UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

|x|   Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
      Act of 1934

                   For the Fiscal Year ended December 31, 1998

|_|   Transition Report Pursuant to Section 13 or 15(D) of the Securities
      Exchange Act of 1934

      For the transition period from _______________ to _______________

                         Commission File Number 0-26284

                            Milestone Scientific Inc.
                            -------------------------
                 (Name of Small Business Issuer in its Charter)

            Delaware                                              13-3545623
            --------                                              ----------
  (State or other jurisdiction                                 (I.R.S. Employer
of incorporation or organization                             Identification No.)

    220 South Orange Avenue, Livingston Corporate Park, Livingston, NJ 07039
    ------------------------------------------------------------------------
               (Address of Principal Executive Office) (Zip Code)

                  Registrant's telephone number (973) 535-2717

Securities registered under Section 12(b) of the Exchange Act:

        Title of Each Class                               Name of Each Exchange
        -------------------                                on Which Registered
                                                           -------------------
Common Stock, par value $.001 per share                  American Stock Exchange
-------------------------------------------                                     

Securities Registered under Section 12(g) of the Exchange Act:

                                      None

      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

      For the year ended December 31, 1998, the revenues of the registrant were
$8,681,614.

      The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based on the closing price on the Nasdaq
Market on March 26, 1999 of $2 1/8 was approximately $18,525,499.

      As of March 26, 1999, the registrant has a total of 8,717,882 shares of
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE
<PAGE>

                           MILESTONE SCIENTIFIC, INC.

                            Form 10-KSB Annual Report
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I
   Item 1.   Description of Business.......................................    4
   Item 2.   Description of Properties.....................................   15
   Item 3.   Legal Proceedings.............................................   15
   Item 4.   Submission of Matters to a Vote of Security Holders...........   17

PART II
   Item 5.   Market for Common Equity and Related Stockholder Matters......   18
   Item 6.   Management's Discussion and Analysis or Plan of Operations....   19
   Item 7.   Financial Statements..........................................   22
   Item 8.   Changes in and Disagreements With Accountants on Accounting 
             and Financial Disclosure......................................   22

PART III
   Item 9.   Directors and Executive Officers, Promoters and Control 
             Persons; Compliance with Section 16(a) of the Exchange Act....   22
   Item 10.  Executive Compensation........................................   22
   Item 11.  Security Ownership of Certain Beneficial Owners and Management   22
   Item 12.  Certain Relationships and Related Transactions................   22
   Item 13.  Exhibits, List and Reports on Form 8-K........................   23

                           FORWARD-LOOKING STATEMENTS

      Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.


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<PAGE>

                                     PART I

Item 1. Description of Business

      All references in this report to the Company refer to Milestone Scientific
Inc. (formerly U.S. Opportunity Search, Inc.), its wholly owned subsidiaries,
Princeton PMC, Inc. ("Princeton PMC") and Sagacity I, Inc., doing business in
the United States as the Wisdom Toothbrush Co. ("Wisdom") and Milestone
Scientific, and its 73.3% owned subsidiary, Spintech, Inc. ("Spintech"), unless
the context otherwise indicates.

General

      The Company develops, manufactures, markets and sells equipment and
related disposable or consumable items and other products for use primarily by
the dental practitioner. Company products focus on practitioner efficiency,
patient comfort, and infection control. The Company's principal product is the
"The Wand(TM)", a computer controlled "painless" injection system enabling the
practitioner to more quickly and effectively anesthetize patients in certain
dental applications, which the Company introduced at the Fall 1997 American
Dental Association Trade Show. The Company began selling equipment units of "The
Wand(TM)" and an initial supply of 100 disposables in January 1998. "The Wand"
is sold to major distributors of dental products, including Sullivan/Schein,
Patterson Dental, and the American Dental Cooperative Member Companies, as well
as directly to dentists through the Company's toll free number.

      The Company also markets and sells (i) "SplatrFree(TM)" disposable prophy
angles and related consumable products for use in dental prophylaxis procedures
and (ii) clinically oriented dental products. The Company markets its other
clinical products directly to users through a dealer network of domestic and
foreign independent sales agencies and persons and manufacturer representatives.
In October 1998, the company entered into an agreement with Smart Practice (a
dental products distributor) to exclusively distribute its Wisdom product line
to non retail customers. In March 1999, the Company reached a verbal agreement
with its supplier of toothbrushes, flosses and other prophylaxis products
allowing Smart Practice to deal directly with the supplier. To date, the Company
has maintained its position as distributor to its retail customer base.

      The Company was organized in August 1989 under the laws of Delaware. On
November 3, 1995, the Company acquired 65% of the outstanding shares of common
stock of Spintech for an aggregate purchase price of $2,700,000. During 1997 and
1998, the Company increased its interest in Spintech to 73.3% by exchanging
shares of Milestone Common Stock for Spintech shares and by exercising the first
two of a series of five annual options each to acquire an additional 3% of
Spintech's shares for a nominal amount granted in the original acquisition
transaction. Spintech developed and owns the technology underlying various
products for healthcare providers, including "The Wand(TM)" and has registered
various patents and trademarks related to these products.

      The Company maintains its executive offices at 220 South Orange Avenue,
Livingston Corporate Park, Livingston, New Jersey 07039, and its telephone
number is (973) 535-2717.

Products

      "The Wand(TM)" Computer Controlled Anesthetic Injection System is a
computer controlled local anesthetic delivery system developed by the Company.
The Company believes "The Wand(TM)" overcomes the typical problems of
conventional anesthetic injections. "The Wand's(TM)" slim pencil-like shape is
more functional to the user and less ominous in appearance to the patient. The
pencil grip provides a greater level of stability for the user by preventing
antagonistic movements between the patient and the practitioner during needle
placement, a positioning control not possible with syringes currently in use. A
computer driven infusion machine operated by the standard air controlled foot
pedal provides the precision flow necessary for painless local anesthesia. "The
Wand(TM)" provides a highly controlled rate of emission of anesthetic solution
in advance of the needle point. The anesthetic and the controlled rate of fluid
emission deadens the path of the needle immediately ahead of the 


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<PAGE>

needle's entry. The controlled rate substantially eliminates the so-called "bee
sting" effect, which is pain associated with the sudden build-up of pressure by
the too rapid flow rate of expelled fluids. Because "The Wand(TM)" uses a
disposable syringe and needle, the Company believes it will offer protection
against patient cross-contamination.

      In many procedures, "The Wand(TM)" more quickly anesthetizes by
eliminating the need for preliminary pain blocking injections and the waiting
time required to see if this injection has taken effect before further
anesthetic injections. The Company believes that "The Wand(TM)" will enable a
dentist to provide painless injections, increase productivity, be more sanitary
and will provide important competitive advantages for dentists trying to build
and maintain their practices. While designed for use in dentistry, "The
Wand(TM)" may also have uses in proctology, podiatry, urology and possibly
dermatology and plastic surgery. To date, the Company has focused its marketing
of "The Wand(TM)" exclusively on the dental market.

      Although many dentists often give painless injections, it is extremely
difficult for them to do so consistently using conventional techniques. Dentists
do not have a strong purchase point against which they may guide their hand when
inserting a needle or while making the injection. The resulting uncontrolled
movement of the needle frequently can be painful to the patient. Although the
dentist is taught to inject slowly, present devices do not allow full control of
the rate of flow. Thus, the needle often enters tissue which has not yet been
anesthetized. "The Wand(TM)"can precisely control the flow rate and modulate
fluid pressure by the use of a microprocessor and electronically controlled
motor.

      The Company began shipping system kits consisting of "The Wand(TM)" driver
unit, 100 disposable handpieces, an instructional video tape and other
instructional material in January 1998. Prior thereto pre-production prototype
of "The Wand(TM)" has been clinically tested in over 1,000 patients. Ninety-six
percent of those tested reported a "painless" or significantly less painful
procedure than standard procedures. Three separate additional clinical studies
were conducted on various aspects of "The Wand(TM)" operation and were published
in major dental publications. In addition, during 1998 two generally favorable
evaluations were reported by independent testing groups.

      In January 1999, the Company received authorization to apply the CE mark
to "The Wand(TM)." This is a requirement for all dental and medical devices
distributed throughout the European Union. Furthermore, in February 1999, the
Company entered into an agreement for the international distribution of "The
Wand(TM)".

      "SplatrFree(TM)" Prophy Angles. Prophy angles are dental drill accessories
incorporating a cup-like tip moving at high rotational speeds which are used by
dentists and oral hygienists in teeth cleaning and other prophylaxis procedures.
Prophy angle tips frequently cause splattering of saliva, particulate matter and
possibly pathogens onto the dentist, hygienist, dental tools and surrounding
surfaces. The "SplatrFree(TM)" prophy angle has a unique tip design that
substantially eliminates splattering. The "SplatrFree(TM)" prophy angle is
available in disposable models. The Company believes that its prophy angle can
improve dental office infection control and hygiene by reducing the spread of
infection from patient to patient and from patient to dentist or hygienist. In
November 1995, 104 pre-production prototype exemplars of the prophy angle,
accompanied by a questionnaire, were distributed to 12 dentists and oral
hygienists for trials. In response to the questionnaire, all 12 dentists and
oral hygienists indicated that the prophy angles they currently use cause heavy
or moderate splattering. Three of those surveyed indicated that use of the
Company's prophy angle eliminated splattering, while seven of those surveyed
indicated that use of the prophy angle reduced splattering noticeably. One
dental practitioner surveyed indicated that the prophy angle reduced splattering
only slightly and another indicated that no reduction in splattering was
observed.

      Clinically Oriented Dental Products; "Wisdom(TM)". In addition to the
proprietary products of the Company, since December 1996 the Company has sold to
dentists a line of clinically oriented dental prophylaxis products which include
the Wisdom line of dentist distributed toothbrushes, flosses and other
prophylaxis products, hand instruments, fluoride treatment products and topical
anesthetics. The clinical line is designed for 


                                       5
<PAGE>

use in a wide variety of dental prophylaxis and periodontal procedures. All of
these products are manufactured by other companies, and the Company acquires
them for resale through a variety of means, including acting as exclusive and
non-exclusive marketing agent, purchasing bulk product for resale, and
purchasing standard products for private labeling.

Manufacturing and Sources of Supply

      "The Wand(TM)" equipment units are manufactured for the Company by Tricor
Systems, Inc. ("Tricor") pursuant to specific purchase orders. In order to fund
certain expenses of Tricor, the Company has continued to advance funds to
Tricor. These advances are reduced as Tricor makes shipments to the Company. Net
advances to Tricor as of December 31, 1997 and 1998 were $760,912 and 1,796,400,
respectively. The Company has received a security interest in certain Tricor
assets.

      The disposable handpiece for "The Wand(TM)" is manufactured for the
Company by Nypro Inc. ("Nypro") pursuant to scheduled production requirements.
Nypro utilizes molds, semi automated assembly equipment and packaging equipment
purchased by the Company. A. $1,712,982 writedown of new, yet unused, semi
automation equipment and molds was made by the Company. The semi automation
equiment and molds were purchased for approximately $2,200,000 in anticipation
of the ramp up of disposable handpiece sales.

      All "SplatrFree(TM)" prophy angles have been produced for the Company by
Team Technologies, Inc. ("TTI") pursuant to an agreement entered into in July
1995. Prototype prophy angles were produced in a single cavity mold purchased by
the Company for $7,000. Commercial quantities of prophy angles are produced
utilizing a 16-cavity production mold capable of producing more than 30,000
prophy angles per day, purchased by the Company at a cost of $72,000. Commercial
delivery of prophy angles began in the first quarter of 1997 after small
modifications to TTI production molds.

      In April 1996, Wisdom entered into an Exclusive Distributorship Agreement
(the "Distributorship Agreement") with Wisdom Toothbrushes Limited ("WTL")
appointing Wisdom as the exclusive distributor of the Wisdom line of dentist
distributed toothbrushes, flosses and other prophylaxis products in the United
States of America, various United States territories, Canada and certain other
smaller markets. In March 1999, this agreement was verbally amended, thereby
allowing Smart Practice to purchase products from the manufacturer and
distribute those products to nonretailed customers. The Distributorship
Agreement will be effectively terminated in April 1999. 

Marketing

      "The Wand(TM)" is marketed to the dental practitioner through a wide group
of dental distributors such as Sullivan/Schein, Patterson, The ADC Dental
Cooperative, and select other regional and local dealers. In addition, the
Company has established 13 regional sales territories in the US and three in
Canada. These territories are staffed by six full time sales people and three
independent sales representatives who work with the distributors to train,
motivate, and direct dealer sales activity. In addition, these representatives
conduct study clubs for dentists, contact and call on dental hygiene schools,
attend local, state and national dental conventions and call on dentists for
training and education purposes. Part time commission sales people are used to
complement these efforts. The company has also conducted an advertising campaign
to the dentist to educate and get leads for sales follow up. Sales literature
and training materials were produced to support the selling and educational
activities of company and dealer representatives.


                                       6
<PAGE>

      The Company markets its other clinical products directly to users through
a dealer network of domestic and foreign independent sales agencies and persons
and manufacturer representatives. The Company currently uses Wisdom to help
market the "SplatrFree(TM)" prophy angle, and in the future it may use the
Wisdom distribution system for marketing its other proprietary products. The
Company currently markets its products primarily in the United States.

Dental and Hygiene School Program

      The Company has a commitment to the dental profession to support the
education and training of future dentists and dental professionals. Accordingly,
the Company offers special educational assistance program to qualified dental
and hygiene schools throughout the United States and Canada. These programs
include providing demo units, a year supply of handpieces per unit, and free
instruction and guidance to participating educators.

Competition

      The Company faces intense competition from some companies in the medical
and dental device industry, including well-established academic institutions,
possessing substantially greater financial, marketing, personnel, and other
resources. Most of the Company's competitors have established reputations,
stemming from their success in the development, sale, and service of medical
products. Further, rapid technological change and extensive research and
development characterize the industry. Current or new competitors could, at any
time, introduce new or enhanced products with features that render the Company's
products less marketable, or even obsolete. Therefore, the Company must devote
substantial efforts and financial resources to enhance its existing products, to
bring its developmental products to market, and to develop new products for its
related markets. In order to compete successfully, the Company must establish an
effective distribution network. Several regulatory authorities must also approve
the Company's products before they may be marketed. There can be no assurance
that the Company will be able to compete successfully, that its competitors will
not develop technologies or products that render the Company's products less
marketable or obsolete, or that the Company will be able to successfully enhance
its existing products, effectively develop new products or obtain required
regulatory approvals therefor.

      "The Wand(TM)" competes with non-automated disposable and reusable
syringes and other local anesthetic delivery systems generally selling at
significantly lower prices and utilizing established and well understood
methodologies. "The Wand(TM)" competes on the basis of its performance
characteristics and offers significant benefits to the dentist and the patient.
It reduces fear, pain and anxiety for the patient and greatly reduces dentist
stress levels. It can be used for all local anesthesia techniques as well as new
and modified techniques. These new techniques allow faster procedures,
shortening of chair time while minimizing numbing of the lips and facial muscles
of expression. It enhances productivity, reduces stress and virtually eliminates
pain and anxiety.

      "SplatrFree(TM)" prophy angles competes with prophy angles produced and
distributed by a number of major manufacturers and distributors and other
producers or distributors of dental products, many of whom have significant
competitive advantages because of their size, strength in the marketplace,
financial and other resources and broad product lines. The Company competes on
the basis of the superior, non-splattering performance of its prophy angle and
product quality.

Patents and Intellectual Property

      The Company's patents are believed to be material to its business and
potential growth. The Company holds the following eight United States patents:

                                                          U.S. Patent   Date of
                               Description                   Number      Issue
                               -----------                   ------      -----
"The Wand(TM)"


                                       7
<PAGE>

Hypodermic Anesthetic Injection Method                     4,747,824     5/31/88

Hypodermic Anesthetic Injection Apparatus                  5,180,371     1/19/93

"SplatrFree(TM)"

Anti-Splattering Rotary Dental Instrument                  5,690,488    11/25/97

Other

Apparatus and Method for Sterilizing, Destroying and
  Encapsulating Medical Implement Wastes                   4,992,217     2/12/91

Apparatus and Method for Verifiably Sterilizing
  Destroying and Encapsulating Regulated Medical Wastes    5,078.924      1/7/92

Apparatus and Method for Verifiably Sterilizing,
  Destroying and Encapsulating Regulated Medical Wastes    5,401,444     3/28/95

Self-Sterilizing Hypodermic Syringe                        5,512,730     4/30/96

Self-Sterlizing Hypodermic Syringe                         5,693,026     12/2/97

      The Company has also filed two additional United States utility patent
applications on improvements in "The Wand(TM)" and its accessories, as well as
design patent applications on various component parts of "The Wand(TM)". Those
applications are presently awaiting examination at the United States Patent and
Trademark Office.

      The Company has adopted the trademarks "SplatrFree(TM)" and "The
Wand(TM)." "SplatrFree(TM)" is registered on the Supplemental Register as United
States Trademark Registration No. 2,226,868, issued February 23, 1999. The
application for "The Wand(TM)"received a Notice of Allowance from the Trademark
Office, and once proof of use of "The Wand(TM)"is submitted, this application
should issue to registration on the Principal Register.

      The Company relies on a combination of patent, copyright, trade secret,
and trademark laws and employee and third-party nondisclosure agreements to
protect its intellectual property rights. Despite the precautions taken by the
Company to protect its products, unauthorized parties may attempt to reverse
engineer, copy, or obtain and use its products and other information the Company
regards as proprietary. Litigation may be necessary to protect the Company's
intellectual property rights and could result in substantial cost to, and
diversion of effort by, the Company with no guarantee of success. The failure of
the Company to protect its proprietary information, and the expenses of doing
so, could have a material adverse effect on the Company's operating results and
financial condition.

      While there are no current claims that the Company's products infringe on
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products or that any such assertion may not
require the Company to cease selling such products, or to enter into
arrangements that require the Company to pay royalties, or to engage in costly
litigation. Although the Company has received no claims of infringement, it is
possible that infringement of existing or future patents or proprietary rights
of others may occur. In the event that the Company's products infringe patent or
proprietary rights of others, the Company may be required to modify its
processes or to obtain a 


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license. There can be no assurance that the Company would be able to do so in a
timely manner, upon acceptable terms and conditions, or at all. The failure to
do so would have a material adverse effect on the Company.

Government Regulation

      "SplatrFree(TM)" prophy angles and "The Wand(TM)" were approved for
marketing in the United States by the FDA in April and July 1996, respectively.
Most of the products in the clinically oriented line of dental products,
including Wisdom toothbrushes, do not require FDA marketing approval. Where such
approval is required for the other products in this product line, it is obtained
by the manufacturer.

      The manufacture and sale of medical devices and other medical products,
such as the "SplatrFree(TM)" prophy angle and "The Wand(TM)", are subject to
extensive regulation by the FDA pursuant to the FDC Act, and by other federal,
state and foreign authorities. Under the FDC Act, medical devices must receive
FDA clearance before they can be commercially marketed in the United States.
Some medical products must undergo rigorous pre-clinical and clinical testing
and an extensive FDA approval process before they can be marketed. These
processes can take a number of years and require the expenditure of substantial
resources. The time required for completing such testing and obtaining such
approvals is uncertain, and FDA clearance may never be obtained. Delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each product submitted.
Similar delays may also be encountered in other countries. Following the
enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA
classified medical devices in commercial distribution into one of three classes.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through general
controls, such as adequate labeling, premarket notification, and adherence to
the FDA's GMP regulations. Some Class I devices are further exempted from some
of the general controls. Class II devices are those devices whose safety and
effectiveness can reasonably be ensured through the use of special controls,
such as performance standards, post-market surveillance, patient registries, and
FDA guidelines. Class III devices are devices which must receive premarket
approval by the FDA to ensure their safety and effectiveness. Generally, Class
III devices are limited to life-sustaining, life-supporting or implantable
devices.

      If a manufacturer or distributor can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required
premarket approval, the manufacturer or distributor may seek FDA marketing
clearance for the device by filing a 510(k) Premarket Notification. The 510(k)
Premarket Notification and the claim of substantial equivalence may have to be
supported by various types of data and materials, including test results
indicating that the device is as safe and effective for its intended use as a
legally marketed predicate device. Following submission of the 510(k) Premarket
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. By regulation, the
FDA has no specific time limit by which it must respond to a 510(k) Premarket
Notification. At this time, the FDA typically responds to the submission of a
510(k) Premarket Notification within 90 to 200 days. The FDA response may
declare that the device is substantially equivalent to another legally marketed
device and allow the proposed device to be marketed in the United States. The
FDA may, however, determine that the proposed device is not substantially
equivalent, or may require further information, such as additional test data,
before the FDA is able to make a determination regarding substantial
equivalence. Such determination or request for additional information could
delay the Company's market introduction of its products and could have a
material adverse effect on the Company. If a device that has obtained 510(k)
Premarket Notification clearance is changed or modified in design, components,
method of manufacture, or intended use, such that the safety or effectiveness or
the device could be significantly affected, separate 510(k) Premarket
Notification clearance must be obtained before the modified device can be
marketed in the United States.

      If a manufacturer or distributor cannot establish that a proposed device
is substantially equivalent, whether or not the FDA has made a determination in
response to a 510(k) Premarket Notification, the 


                                       9
<PAGE>

manufacturer or distributor will have to seek premarket approval of the proposed
device. A premarket approval application (a "PMA application") would be
supported by extensive data, including pre-clinical and human clinical trial
data, as well as extensive literature, to prove the safety and efficacy of the
device. Upon receipt, the FDA will conduct a preliminary review of the PMA
application to determine whether the submission is sufficiently complete to
permit substantive review. If sufficiently complete, the submission is declared
acceptable for filing by the FDA. By regulation, the FDA has 180 days to review
a PMA application once it has been declared acceptable for filing. While in the
past the FDA has responded to PMA applications within the allotted time period,
more frequently PMA reviews occur over a significantly protracted time period,
and generally take approximately two years or more from the date of filing to
complete. A number of devices for which FDA marketing clearance has been sought
have never been cleared for marketing.

      If human clinical trials of a proposed device are required and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
the specific number of investigational sites and could include the number of
patients approved by the FDA.

      Though the "SplatrFree(TM)" prophy angle and "The Wand(TM)" have received
FDA clearance based on its 510(k) Premarket Notification, there can be no
assurance that any of the Company's other products under development will obtain
the required regulatory clearance on a timely basis, or at all. If regulatory
clearance of a product is granted, such clearance may entail limitations on the
indicated uses for which the product may be marketed. In addition, modifications
may be made to the Company's products to incorporate and enhance their
functionality and performance based upon new data and design review. There can
be no assurance that the FDA will not request additional information relating to
product improvements, that any such improvements would not require further
regulatory review thereby delaying the testing, approval and commercialization
of the Company's development products or that ultimately any such improvements
will receive FDA clearance.

      Compliance with applicable regulatory requirements is subject to continual
review and will be monitored through periodic inspections by the FDA. Later
discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
fines, delays or suspensions of regulatory clearances, seizures or recalls of
products, operating restrictions and criminal prosecution and could have a
material adverse effect on the Company.

      The Company is subject to pervasive and continuing regulation by the FDA
regulations which requires manufacturers of medical devices to adhere to certain
"Good Manufacturing Practices" ("GMP") as defined by the FDC Act. GMP require
testing, quality control and documentation procedures. Failure to comply with
GMP can result in the suspension or termination of production, product recall or
fines and penalties. Products must also be manufactured in registered
establishments. In addition, labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. The export of devices is also subject to regulation in certain
instances.

      The Medical Device Reporting ("MDR") regulation obligates the Company to
provide information to the FDA on product malfunctions or injuries alleged to
have been associated with the use of the product or in connection with certain
product failures which could cause serious injury. If, as a result of FDA
inspections, MDR reports or other information, the FDA believes that the Company
is not in compliance with the law, the FDA can institute proceedings to detain
or seize products, enjoin future violations, or assess civil and/or criminal
penalties against the Company, its officers or employees. Any action by the FDA
could result in disruption of the Company's operations for an undetermined time.

      In addition to the foregoing, numerous other federal and state agencies,
such as environmental, fire hazard control, working condition and other similar
regulators, have jurisdiction to take actions that could have a 


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<PAGE>

materially adverse effect upon the Company's ability to do business. In
addition, expansion of the Company's operations into foreign markets will
require the Company to obtain additional approvals, permits or licenses and
comply with additional regulatory schemes to those of the United States.
Amendments to existing statutes and regulations, adoption of new statutes and
regulations and expansion of the Company's business could require the Company to
alter methods of operations at costs that could be substantial, which could have
an adverse effect on the Company. There can be no assurance that the Company
will be able, for financial or other reasons, to comply with applicable laws and
regulations and approval, permit or license requirements. Currently, the Company
believes it is in compliance with all applicable statutes and regulations
governing its operations and business as currently conducted, including, without
limitation, those in respect of the "SplatrFree(TM)" prophy angles and "The
Wand(TM)", and the Company has all necessary approvals, permits and licenses
that are applicable to its business, operations and products and services.

Product Liability

      Failure to use any of the Company's products in accordance with
recommended operating procedures could potentially result in subjecting users to
health hazards or injury. Failures of the Company's products to function
properly could subject the Company to claims of liability. The Company maintains
liability insurance in the aggregate amount of $2,000,000 with a per-occurrence
limit of $1,000,000 and a $10,000,000 umbrella policy which the Company believes
to be adequate. Although no claims have been made against the Company or any of
the customers using its products, there can be no assurance that such claims
will not arise in the future or that the insurance coverage will be sufficient
to pay such claims. A partially or completely uninsured claim, if successful and
of significant magnitude, could have a material adverse effect on the Company.

Research and Development Activities

      During the 1997 and 1998 fiscal years, the Company expensed $981,078 and
$436,024, respectively, on research and development activities.

Employees

      The Company had 25 full-time employees at December 31, 1998, which
includes 3 executive officers. The Company also uses the services of certain
outside consultants for marketing and other activities.

Certain Risk Factors That May Affect Growth And Profitability

      The following factors may affect the growth and profitability of the
Company and should be considered by any prospective purchaser of the Company's
securities:

      Unless stated to the contrary, all references in this Annual Report on
From 10-KSB to "we," "us," "our" or "the Company" refer to Milestone Scientific
Inc. and its subsidiaries.

      History of Losses; Accumulated Deficit. Our operations commenced in
November 1995, when we acquired a 65% interest in Spintech. For the fiscal years
ending December 31, 1995, 1996 and 1997 we had limited revenues. For the fiscal
year ended December 31, 1998 our revenues were approximately $8.8 million. In
addition, we have had losses for each of the years ended December 31, 1995,
1996, 1997 and 1998 including a loss of approximately $10.7 million for 1998. At
December 31, 1998 we had an accumulated deficit of approximately $20.9 million.
We cannot assure you we will be able to generate operating profits and resultant
cash flow sufficient to fund our operations in the future.

      Need for Market Acceptance of "The Wand". As with any new technology,
there is substantial risk that the marketplace will not accept the potential
benefits of such technology or be willing to pay for any cost 


                                       11
<PAGE>

differential with the existing technologies. Market acceptance of "The Wand"
depends, in large part, upon our ability to educate potential customers of the
distinctive characteristics and benefits of The Wand and will require
substantial marketing efforts and expense. During the first quarter of 1998 and
through the next month and a half of the second quarter, the Company in an
effort to meet the demand for the product, maintained high levels of production
and committed capital to increase production capacity. The product's early
success was then tempered by significant returns and declining sales throughout
the remainder of the year. In addition, during the last quarter of 1998, less
than 300,000 disposable handpieces were sold. Since at least one disposable
handpieces should be used for each patient visit, this reflects a low level of
usage of The Wand units by dentists. Unless equipment sales and rates of usage
of the equipment improve, we may be forced to curtail marketing efforts and rely
on the gradual build-up of demand as a result of increasing placement of units
in dental schools and from growing awareness of the benefits of The Wand
technology as a result of additional clinical studies. We cannot assure that our
current or proposed products will be accepted by the end users or that any of
the current or proposed products will be able to compete effectively against
current and alternative products.

      Limited Financial Resources; Need for Additional Financing. Our capital
requirements have been and will continue to be significant.. Assuming no
improvement to our business operations we believe that we have sufficient
working capital for the next 12 months. However, if we have underestimated our
operating expenses or our expected revenue, we will be required to borrow funds
or sell equity securities, or curtail or reduce our activities. We have no
current arrangements for future additional financing. We cannot assure you any
sources of additional financing will be available on acceptable terms, or at
all. To the extent that any future financing involves the sale of our equity
securities, the ownership interest of our-stockholders could be substantially
diluted.

      Highly Competitive Industry; Technological and Product Obsolescence. We
face intense competition from many companies in the medical and dental device
industry, including well-established academic institutions, possessing
substantially greater financial, marketing, personnel, and other resources. Most
of our competitors have established reputations, stemming from their success in
the development, sale, and service of competing dental products. Further, rapid
technological change and research may affect our product. Current or new
competitors could, at any time, introduce new or enhanced products with features
that render our products less marketable, or even obsolete. Therefore, we must
devote substantial efforts and financial resources to enhance our existing
products, to bring our products to market quickly, and to develop new products
for related markets. In addition, our ability to compete successfully, require
that we establish an effective distribution network. Several regulatory
authorities must approve our products before they may be marketed. We cannot
assure you that we can compete successfully, that our competitors will not
develop technologies or products that render our products less marketable or
obsolete, or that we will be able to successfully enhance its existing products,
effectively develop new products, or obtain required regulatory approval for
those products.

      Limited Distribution; Establishing Distribution Channels. Our future
revenues depends on our ability to successfully market and distribute The Wand.
During 1998 we relied, primarily, on independent dental distributors to sell The
Wand. After the first quarter of 1998, it became apparent that their efforts
were largely unsuccessful. Accordingly, we have been forced to consider
alternative means of distributing the product, including the use of our own
sales force. At present, our sales force is quite limited and, if we decide to
market The Wand with our own sales force, that sales force will require
substantial expansion and we will incur significant up-front expense. We cannot
assure you that we will be able to hire and retain our own sales force or that
such force will be able to successfully market and sell The Wand.

      Patent and Intellectual Property Protection. We hold U.S. patents
applicable to the "The Wand(TM)" and we have applied for certain improvement
patents on The Wand as well as the "SplatrFree(TM)" prophy angle. We rely on a
combination of patent, trade secret, and trademark laws and employee and
third-party nondisclosure agreements to protect our intellectual property
rights. Despite the precautions we have taken to protect our products,
unauthorized parties may attempt to reverse engineer, copy, or obtain and use
its products and other information we regard as proprietary. We may have to
initiate lawsuits to protect our intellectual property rights.


                                       12
<PAGE>

Such lawsuits are costly and divert management's time and effort away from our
business with no guarantee of success. Our failure to protect our proprietary
rights, and the expense of doing so, could have a material adverse effect on our
operating results and financial condition. Although we have not received any
claims of infringement, it is possible that our products may infringe on
existing or future patents or proprietary rights of others. If that happens we
may have to modify our processes or to obtain a license. We cannot assure you
that that we will be able to do so in a timely manner, upon acceptable terms and
conditions, or at all.

      Dependence on Manufacturers. We have informal arrangements with certain
manufacturers with respect to the manufacture of our products. Termination of
the manufacturing relationship with any of these manufacturers could
significantly and adversely affect our ability to produce and sell our products.
Though alternate sources of supply exist and new manufacturing relationships
could be established, we would need to recover our existing tools or have new
tools produced. Establishing of new manufacturing relationships could involve
significant expense and delay. Any curtailment or interruptions of the supply,
whether or not as a result or termination of the relationship, would adversely
affect us.

      Product Liability. We could be subject to claims for personal injury from
the use of its dental and medical products. We have liability insurance in the
aggregate amount of $2,000,000 with a per-occurrence limit of $1,000,000 which
we believe is adequate, although we cannot assure you that the insurance
coverage will be sufficient to pay such claims should they be made. A partially
or completely uninsured claim, if successful and of significant magnitude, could
have a material adverse effect on us.

      Reliance Upon Management. We depend on the personal efforts and abilities
of Leonard Osser, our Chairman and Chief Executive Officer. While we have a key
man life insurance policy in the amount of $3,000,000 on the life of Mr. Osser
any loss of his services could have materially adverse effect.

      Litigation; Change in Officers. On April 10, 1997, the Board of Directors
of Spintech terminated the employment of Dr. Ronald Spinello as its Chairman and
Director of Research. The action by the Board follows the bringing by Milestone
and Spintech of legal action against Dr. Spinello in which they seek, among
other things, a declaratory judgment that Dr. Spinello has no personal rights to
certain technology developed while he was employed as Director of Research of
Spintech relating to the design and production of ancillary components of "The
Wand(TM)" and a declaratory judgment that they have not breached Dr. Spinello's
employment agreement. Milestone, as principal stockholder of Spintech, also
removed Dr. Spinello and Glenn Spinello as directors of Spintech. On May 21,
1997, Dr. Spinello filed an Answer and Counterclaim denying the material
allegations of the complaint and making certain counterclaims, including
recovery for breach of his employment agreement. On May 28, 1997, Milestone and
Spintech filed a reply to the counterclaim denying any liability. Milestone has
been advised by its patent counsel that all technology developed by Dr. Spinello
while employed by Spintech is owned by Spintech. Further, we believe that
ownership of the technology relating to these ancillary components which are the
subject of this litigation is not required for the manufacture and sale of its
anesthetic delivery system at economically viable prices.

      In addition, a Class Action lawsuit has been brought against the Company
seeking damages in an amount that may substantially exceed our insurance
coverage. Further, though Milestone believes it has meritorious defenses, the
defense of the action would divert management's attention from operation of the
business.

      No Dividends. We have never paid a cash dividend on our Common Stock.
Payment of dividends on our Common Stock is within the discretion of the Board
of Directors and will depend upon our earnings, capital requirements and
financial condition, and other relevant factors. We do not currently intend to
declare any dividends on our Common Stock in the foreseeable future.

      Control by Certain Persons. Our current officers and directors own
approximately 30% of the currently outstanding shares of Common Stock.
Accordingly, by reason of their stockholdings, and their control of the means
for soliciting stockholder votes, the officers and directors will be able to
exercise control and, in all likelihood, will be able to continue to elect all
directors.


                                       13
<PAGE>

      Limitation of Director Liability. Our Certificate of Incorporation
provides that our directors are not be personally liable to us or any of our
stockholders for monetary damages for breach of the fiduciary duty of care as a
director, including breaches which constitute gross negligence, subject to
certain limitations imposed by the Delaware General Corporation Law. Thus, under
certain circumstances, neither we nor our stockholders can recover damages even
if directors take actions which harm us.

      Government Regulation and FDA Clearance. The manufacture and sale of the
Company's "SplatrFree(TM)" prophy angles and "The Wand(TM)", are subject to
extensive regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic
Act ("FDC Act"), and by other federal, state and foreign authorities. Under the
FDC Act, these medical devices must receive FDA clearance before they can be
commercially marketed in the United States. Some products must undergo rigorous
pre-clinical and clinical testing and an extensive FDA approval process before
they can be marketed. These processes can take a number of years and require the
expenditure of substantial resources. The time required for completing such
testing and obtaining such approvals is uncertain, and FDA clearance may never
be obtained. Delays or rejections may be based upon changes in FDA policy during
the period of product development and FDA regulatory review of each submitted
application. Similar delays may also be encountered in other countries. While
the "SplatrFree(TM)" prophy angle and "The Wand(TM)" have received FDA marketing
clearance there can be no assurance that all of our products under development
will obtain the required regulatory clearance on a timely basis, or at all. If
regulatory clearance of a product is granted, such clearance may limitations on
the indicated uses for which the product may be marketed. In addition,
modifications may be made to our products to incorporate and enhance their
functionality and performance based upon new data and design review. There can
be no assurance that the FDA will not request additional information relating to
product improvements, that any such improvements would not require further
regulatory review thereby delaying the testing, approval and commercialization
of the our products or that ultimately any such improvements will receive FDA
clearance. FDA regulations also require manufacturers of medical devices to
adhere to certain "Good Manufacturing Practices" ("GMP"), which include testing,
design, quality control and documentation procedures. Compliance with applicable
regulatory requirements is subject to continual review and will be monitored
through periodic inspections by the FDA. Later discovery of previously unknown
problems with a product, manufacturer, or facility may result in restrictions on
such product or manufacturer, including fines, delays or suspensions of
regulatory clearances, seizures or recalls of products, operating restrictions
and criminal prosecution and could have a material adverse effect on us.

      Restricted Securities; Possible Volatility of Market Price. Shares of our
Common Stock are currently traded on The American Stock Exchange. From time to
time the market prices of dental and medical product companies have been
affected by various factors, including adverse publicity. We cannot assure you
that the market price of our Common Stock will not be volatile as a result of
factors such as the our financial results, possible adverse publicity resulting
from any infractions of governmental regulations and various other factors
affecting dental and medical product companies or the market generally. In
recent years the stock market has experienced wide price fluctuations not
necessarily related to the operating performance of such companies.

      Effect of Outstanding Warrants and Options. We currently have outstanding
options and warrants to purchase 2,367,530 shares of our Common Stock at prices
ranging from $1.56 to $23.00 per share. Holders of these warrants and options
are given the opportunity to profit from a rise in the market price of our
Common Stock and are likely to exercise their securities at a time when we would
be able to obtain additional equity capital on more favorable terms. Thus, the
terms upon which we will be able to obtain additional equity capital may be
adversely affected since the holders of outstanding options and warrants can be
expected to exercise them at a time when we would, in all likelihood, be able to
obtain any needed capital on terms more favorable to us than the exercise terms
provided by such outstanding securities. We have granted registration rights
with respect to our shares of our Common Stock covered by these warrants.


                                       14
<PAGE>

Item 2. Description of Property

      On March 20, 1997 Milestone opened new corporate headquarters and
administrative offices occupying approximately 2,693 square feet at 220 South
Orange Avenue, Livingston Corporate Park, Livingston, New Jersey. The Company
occupies this space under a five (5) year and one (1) month lease at a cost the
Company believes to be competitive. Spintech's accounting functions were moved
to the new corporate headquarters. Spintech's operational functions are located
at and consolidated with those of Wisdom in Deerfield, Illinois.

      The Company's two adjoining facilities in Deerfield, Illinois occupy
approximately 9216 square feet. The facilities serve as the Company's
distribution center for all of its products, the headquarters for its Spintech
and Sagacity subsidiaries, and the telemarketing office for The Wand(TM). In
December 1998, the Company extended their lease term until December 31, 1999 for
one facility. In March 1999, as per the landlord's stipulations, the Company
moved from the other facility (approximately 4608 square feet) to a
non-adjoining facility of similar area in the same complex. This is a month to
month lease. The Company's marketing and sales department were relocated to this
facility.

Item 3. Legal Proceedings

      Spinello Lawsuits

      On March 26, 1997, Milestone and Spintech commenced legal action in the
United States District Court of New Jersey against Ronald Spinello, DDS, former
Chairman and Director of Research of Spintech. In the complaint, plaintiffs seek
recovery of compensatory and punitive damages for extortion and tortious
interference with existing and prospective contract and business relationships,
a declaratory judgment that Dr. Spinello has no personal rights to certain
technology developed while he was employed as Director of Research of Spintech
relating to the design and production of ancillary components of its computer
controlled local anesthetic delivery system, a declaratory judgment that
plaintiffs have not breached Dr. Spinello's employment agreement or the
agreement for the initial purchase by Milestone of a 65% equity interest in
Spintech and injunctive relief. On May 21, 1997, Dr. Spinello filed an answer
and counterclaim which denies the material allegations of the complaint and
seeks recovery for breach of the defendant's employment agreement, initiates a
derivative action against Milestone with respect to various expenditures and
actions for which Defendant, on behalf of Spintech, seeks an amount in excess of
$75,000, alleges civil conspiracy against Milestone with respect to certain of
those matters and the entry into the employment agreement with Defendant and
seeks indemnification for expenses, including attorneys fees, in the pending
action. On May 25, 1997 the Company filed a reply to counterclaims which denied
all of the material allegations of the counterclaims. On December 30, 1997, Dr.
Spinello made a motion for leave to join as an additional Defendant on
Counterclaim the Company's Chairman, Leonard Osser, and to file an amended
Answer and Counterclaim against the Company. Both the Company and Mr. Osser
opposed the motion and in addition, the Company made a Cross-Motion to dismiss
certain claims asserted in the initial Answer and Counterclaim. The additional
claims which Dr. Spinello sought to assert against the Company include a fraud
in the inducement claim based upon the alleged failure of the Plaintiffs to
advise Dr. Spinello of the legal effects of his employment agreement; and a
civil conspiracy claim. Dr. Spinello also sought to add a jury demand through
his amended pleading. The Company's Cross-Motion sought to dismiss all of Dr.
Spinello's claims, except his claim for unpaid salary, on the basis that his
derivative claim is fatally defective because he did not make any demand upon
Spintech, the entity on whose behalf he purports to bring suit, and his
indemnification claim is fatally defective because the claims against him do not
arise by reason of the fact that Dr. Spinello was an officer or director of
Spintech.

      On May 5, 1998, the United States Magistrate Judge issued a Report
recommending that the Court grant Milestone's motions to dismiss the
counterclaims brought by defendant Spinello for a shareholder's derivative
action and civil conspiracy, finding that defendant Spinello had failed "to
state a claim upon which relief may be granted." The Report also recommended
that the Court dismiss defendant Spinello's counterclaim for indemnification
against Milestone and a portion of the indemnification claim against Spintech.
In a second 


                                       15
<PAGE>

decision, the Magistrate Judge denied defendant Spinello's motion to join
Milestone's Chief Executive Officer as an additional party and to file an
amended answer asserting revised and additional counterclaims against Milestone
and Spintech. The Magistrate Judge determined that defendant Spinello's proposed
amended counterclaims "are futile and could not withstand a motion to dismiss
under federal rule of civil procedure 12(b)(6)". Defendant Spinello timely filed
an appeal from the May 5, 1998 Order and objections to the Report. On August 24,
1998, a United States District Judge for the District of New Jersey issued a
memorandum opinion and signed an Order denying Dr. Spinello's appeal of the May
5, 1998 Order and affirming the May 5, 1998 Order in its entirety. The Judge
further denied in its entirety Dr. Spinello's objections to the Report and
granted the Company's motion to dismiss counts one, two, three and four of Dr.
Spinello's initial Counterclaim.

      As a result of the affirmance of the May 1998 Order and the adoption of
the Report granting the Company's motion to dismiss, the only claims remaining
in the litigation with Dr. Spinello are Milestone's claims against Dr. Spinello
and Dr. Spinello's counterclaim for unpaid salary for the period subsequent to
his alleged wrongful termination, and a portion of his indemnification claim
against Spintech.

      In October 1998, the Company received a settlement demand from Counsel for
Dr. Spinello and Glenn Spinello which stated that, notwithstanding the United
States District Judge's decision, substantial claims remain to be litigated and
that there are substantial risks to Milestone from this litigation. The
settlement demand letter, which was not accepted by the Company, does not
describe the nature of any claims that Dr. Spinello could assert against the
Company, but it does allude to potential litigation in other forums and the
possibility of future litigation brought by minority stockholders of the
Company. If Dr. Spinello does seek to assert additional claims, or if minority
stockholders should assert claims, against the Company, the Company intends to
vigorously defend such claims and believes that it has meritorious defenses
thereto.

      On March 5, 1999, the parties completed discovery. The parties are
currently preparing various dispositive motions for summary judgment on certain
of the issues remaining in the case. The motions are scheduled to be filed on or
about April 15, 1999, with a return date of May 10, 1999. If the motions for
summary judgment are not granted, the Court will hold a trial on any remaining
issues in late 1999. The Company believes that it has meritorious defenses to
Dr. Spinello's claims and meritorious claims against Dr. Spinello. Moreover,
Milestone has been advised by its patent counsel that all technology developed
by Dr. Spinello while employed by Spintech is owned by Spintech. The Company
believes that ownership of the technology relating to these ancillary components
which are the subject of this litigation in no way prevents the manufacture and
sale of its anesthetic delivery system at economically viable prices.

On May 20, 1997, Glenn R. Spinello filed a Complaint in the Court of Common
Pleas, York County, Pennsylvania seeking damages as a result of the alleged
breach of his Employment Agreement. On June 20, 1997, the Company and Spintech
filed a notice of Removal which transferred venue of Glenn Spinello's lawsuit to
the United States District Court for the Middle District of Pennsylvania. On
June 27, 1997, the Company and Spintech filed an Answer to Glenn Spinello's
Complaint which denied the material allegations of the Complaint and asserted
counterclaims based upon Glenn Spinello's breach of his Employment Agreement. On
July 27, 1997 Glenn Spinello filed a reply to the counterclaims by the Company
and Spintech, denying the material allegations of the counterclaims. On March
16, 1999, the parties completed discovery. Although the case is scheduled for
trial during the fall of the 1999 term, Glenn Spinello's attorney advised us
that he intends to move for summary judgment. Any such motion must be filed by
April 16, 1999. The Company intends to oppose such a motion and, if successful,
proceed to trial. The Company believes it has meritorious defenses to Glenn
Spinello's claims and meritorious counterclaims.

      Class Action Lawsuit

      Several class action lawsuits have been commenced against the Company,
certain present and former executive officers, one outside director and
consultants in the United States District Court for the District of New 


                                       16
<PAGE>

Jersey. The District Judge before whom the cases are pending has entered an
order consolidating all of the class actions into one consolidated action. The
Complaints contain generally overlapping and similar allegations of violations
of the Securities Exchange Act of 1934, including allegations that the Company
and certain of the other defendants violated the Act by issuing false and
misleading financial statements and disseminating misleading statements about,
among other things, the demand for the Company's principal product, its expected
sales growth, the acceptance of that product by dental professionals, shipments
during certain time periods and misrepresentations as to third-party evaluations
of the efficacy of the product through failure to disclose the issuance of stock
options to certain consultants. On October 22, 1998, the District Judge entered
an order appointing lead plaintiff to represent the interests of all class
members. Milestone believes that material allegations of the complaints lack
merit and intends to vigorously defend the above actions. Specifically,
Milestone believes that its financial statements presents fairly its results of
operations, that the information which it has publicly disclosed does not
contain any material misstatements or misrepresentations and that stock options
issued to persons who published research reports were issued for other services
for the Company, principally service as spokespersons and demonstrators of the
Company's product. Further, the Company continues to believe that The Wand(TM)
embodies superior technology, is a major advance in dentistry and may ultimately
become the accepted method for delivering local dental anesthesia.

      Derivative Action Lawsuit

      In February 1999, a purported owner of Milestone stock, had commenced a
derivative action on behalf of the Company, in the Court of Chancery of the
State of Delaware in Newcastle County, against certain present and former
executive officers and directors. In the action, plaintiff alleges that based on
the same facts as the class actions described above, the defendants engaged in
violations of the securities laws, committed fraud and securities fraud, wasted
corporate assets and damaged the Company's reputation. As a derivative action,
even if the plaintiff is successful, any award, after deduction of plaintiff's
costs and disbursements, would be payable to the Company. Nevertheless,
Milestone believes that the material allegations of the complaint lack merit and
intends to provide a legal defense for its present and former officers and
directors in accordance with the indemnification provisions of its Certificate
of Incorporation.

      Insurance Broker and Carrier

      In January 1999, the Company filed a complaint against its insurance
broker (Frank Crystal Financial Services) and the two excess insurers [American
Alliance and St. Paul] in the United States District Court for the District of
New Jersey. American Alliance and St. Paul are currently in dispute with the
Company because they claim that the Company did not timely submit the
appropriate application. As a result, American Alliance refused to issue a
policy and St. Paul, which issued a policy, has refused to cover the class
action described above. The Company believes that these excess carriers were
required to issue excess directors' and officers' liability insurance because it
paid the premium on a timely basis. The premium was subsequently distributed to
and deposited by the insurers. In February, 1999, the Company received and
accepted with certain reservation, the check from American Alliance covering its
premium portion. The action is in its early stages.

Item 4. Submission of Matters to a Vote of Security Holders

      (a)   Not applicable.

      (b)   Not applicable.

      (c)   Not applicable.


                                       17
<PAGE>

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

      (a)   Market Information

      The Company's Common Stock had been traded on The Nasdaq SmallCap Market
under the symbols "USOS" from November 3, 1995 through December 5, 1996 and
"WAND" from December 6, 1996 through January 6, 1998. The Common Stock has
traded on the Nasdaq National Market under the symbol "WAND" from January 7,
1998 through April 22, 1998. Since such date, the Common Stock has traded on the
American Stock Exchange under the symbol "MS."

      The following table sets forth the high and low bid prices as quoted by
The Nasdaq SmallCap Market and the Nasdaq National Market from January 1, 1997
through April 22, 1998. Thereafter, it contains the high and low closing prices
as quoted by the American Stock Exchange. Such quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.

                                                     Bid Price
                                        High                         Low
1997

First Quarter                         $ 6.50                      $ 4.875
Second Quarter                        $ 6.625                     $ 4.625
Third Quarter                         $28.375                     $ 6.25
Fourth Quarter                        $28.00                      $15.50

1998

First Quarter                         $24.375                     $15.250
Second Quarter (through April 3)      $18.5                       $17.625

                                                   Closing Price
                                        High                         Low

Second Quarter (after April 3)        $19.375                      $5.4375
Third Quarter                         $ 4.688                      $1.50
Fourth Quarter                        $ 1.813                      $ .938

          (b)     Holders

      As of February 24, 1999, the number of record holders of the Common Stock
of the Company was 143. The Company believes that there are more than 3,500
beneficial holders of the Common Stock.

      (c)   Dividends

      The holders of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. The Company has not paid and
does not expect to declare or pay any dividends in the foreseeable future.


                                       18
<PAGE>

ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
       of Operation

      Coinciding with the initial launch of The Wand(TM), (a computer controlled
"painless" injection system) during the first quarter of 1998 and through the
next month and a half of the second quarter, the Company maintained high levels
of production and committed capital to increase production capacity. The
product's early success was then tempered by significant returns and declining
sales throughout the remainder of the year. In combination with the filing of
class action lawsuits, these conditions have resulted in higher levels of
inventory and production capacity that far exceed current demand. Therefore, the
Company, as explained below, has provided reserves against sales sufficient to
cover possible product returns and has reduced the carrying value of its
inventory to reflect their value under the current market conditions, and has
significantly reduced the net book value of its molds, handpiece manufacturing
equipment and handpiece equipment.

      Fiscal year ended December 31, 1998 compared to fiscal year ended December
31, 1997.

Statement of Operations

      Net sales for the years ended December 31, 1998 and December 31, 1997 were
$8,804,235 and $2,854,271 respectively. The $5,949,964 or 208% increase is
mainly attributable to approximately $6,622,000 in net sales for The Wand(TM),
including disposable handpieces, offset by a decrease in net sales from the
company's Wisdom product line of approximately $672,000.

      Cost of sales for the years ended December 31, 1998 and December 30, 1997
were $10,447,796 and $1,857,465, respectively. The $8,287,331 increase is mainly
attributable to the cost of sales for The Wand(TM).

      Included in the cost of sales for "The Wand(TM)" is a $1,244,144 writedown
in the carrying value of the inventory and a $1,982,000 reduction in the net
book value of fixed assets. The latter reduction includes a $269,000 obsolete
equipment writeoff. The remainder or $1,712,982 is the writedown of new, yet
unused semi automation equipment and molds. The semi automation equipment and
molds were purchased for approximately $2,200,000 in anticipation of the rampup
of disposable handpiece sales.

      For the year ended December 31, 1998, the Company incurred a gross loss of
$1,340,560 as compared to a gross profit of $996,806 for the year ended December
31, 1997. The $2,337,366 decrease in mainly attributed to the costs of "The
Wand(TM)" including the reduction in the carrying value of "The Wand(TM)"
inventory and a writedown of the production equipment and molds associated with
the product partially offset by "The Wand(TM)" sales.

      In conjunction with the launch of The Wand(TM) during the first quarter of
1998, the Company established a $528,000 reserve against sales. This reserve was
established to cover expected returns attributable to first quarter sales. For
the remaining quarters, actual returns attributable to those quarters were
recorded upon receipt. Additional reserves were established to cover expected
returns attributable to prior quarter sales. On December 31, 1998, the reserve
was $56,500.

      Selling, general and administrative expenses for the years ended December
31, 1998 and December 31, 1997 were $9,336,445 and $5,550,719 respectively. The
$3,785,726 or 68% increase is primarily attributable to approximately $4,237,000
aggregate increase in selling and marketing expenses associated with The
Wand(TM), an increase in legal and professional fees of approximately $501,000,
and a $290,000 increase in corporate salaries. This was partially offset by a
$938,000 decrease in expenses associated with the Wisdom product line and a
decrease of $229,208 in compensation expense related to option grants.


                                       19
<PAGE>

      Research and development costs for the years ended December 31, 1998 and
December 31, 1997 were $436,024 and $981,078, respectively. The $545,054
decrease is primarily attributable to the cost incurred in developing "The
Wand(TM)" during 1997.

      In 1997, the Company recognized a one time charge of $2,126,670 for
compensation associated with the Princeton PMC purchase. It was based upon the
issuance of 159,900 additional shares that the Company was obligated to issue in
exchange for the minority interest of Princeton PMC, pursuant to the 1996
Acquisition Agreement. These shares were issued to the chief operating officer
and director of the Company who in 1998 resigned his position with the Company.

      Net interest income for the years ended December 31, 1998 and December 31,
1997 were $414,675 and $220,877, respectively. The $193,798 increase was mainly
attributable to investment income from the net proceeds of two private
placements in 1997 and aggregate lower borrowings under the Company's line of
credit.

      The net loss for the years ended December 31, 1998 and 1997 were
$10,698,354 and $7,438,117. The net loss for 1998 is primarily attributed to the
costs associated with "The Wand(TM)" and include reserves and reductions in
carrying values of inventory and fixed assets since the Company's inventory
level and production capacity exceed the current product demand. 

Liquidity and Capital Resources

      At December 31, 1998, the Company's working capital was $4,538,071. It
consisted primarily of cash generated from two private placements in 1997 and
from exercised warrants.

      For the year ended December 31, 1998, the Company decreased cash and cash
equivalents by $9,458,313 using $8,649,870 in operating activities and
$1,587,311 in capital expenditures.

      For the year ended December 31, 1998 the Company's net cash used in
operating activities was $8,649,870. This was primarily attributable to a net
loss of $10,698,354 (adjusted for non cash items of $244,559 for patent
amortization, $336,002 for depreciation, $1,982,321 loss on impairment of fixed
assets, $1,243,986 loss on writedown of inventory and $221,452 for compensation
expense), a $112,760 increase in accounts receivable, a $1,249,620 increase in
inventory a $29,484 increase in prepaid expenses, a decrease in accounts payable
of $509,249 and a decrease in accrued expenses of $82,131.

      The $807,543 used in investing activities for the year ended December 31,
1998 was attributable to $3,317,972 in capital expenditures, offset by the
maturing of $2,510,429 in treasury bills.

      Financing activities provided $489,891 for the period. The Company
received $489,891 as 119,591 warrants and 36,425 options were exercised. In June
1998 the Company used $911,516 to repurchase 100,000 shares of its stock. The
Company's Wisdom subsidiary decreased its borrowing under its line of credit by
$25,000.

      As of December 31, 1998, the Company had approximately $3.6 million in
aggregate cash, cash equivalents and treasury bills. Management believes that
through the proper utilization of these existing funds, the expense reductions
achieved through cost containment programs, the Company will have sufficient
cash to meet its needs for the next twelve months.

      Also, the Company has taken steps that are aimed at growing and
strengthening the end user base thereby gaining greater acceptance of The
Wand(TM) and translating to increased revenue through higher disposable


                                       20
<PAGE>

handpiece usage. These steps include a) expanding its market overseas, b)
obtaining feedback and providing further support to current Wand users, c)
increasing the number of dental schools which include The Wand(TM) in their
curriculum, d) distributing Wand(TM) technique videos and technical bulletins to
its current users, e) conducting direct to patient advertising with specialized
sales effort in test markets and f) maintaining a well trained service staff.

      Subsequent to year end, the Company achieved two major objectives in its
international marketing effort. In January 1999, "The Wand(TM)" was approved
under the Medical Device Directive 93/42/EEC, a requirement for all dental and
medical devices distributed throughout the European Union. This authorizes the
Company to apply the CE mark to the product. In February 1999, the Company
entered into an agreement for the international distribution of "The Wand(TM)"
by the Dent-X dental division of AFP Imaging Corporation ("AFP"), through the
international distribution network previously established by AFP for its dental
and medical imaging products, intraoral video cameras, digital X-ray systems and
other dental products. Under the agreement, Milestone continues to be
responsible for distribution of "The Wand(TM)" in the United States, Canada,
China, Hong Kong and Taiwan. AFP assumes certain existing international
distribution arrangements previously established by Milestone in South Africa,
Israel and certain other countries. AFP has an extensive network of foreign
distributors and representatives. Its foreign sales, or domestic sales for
export, constituted more than one-third of its total sales in fiscal 1998. AFP
is a medical and dental imaging equipment supplier whose products are widely
applied in medical and dental diagnostics.

      The Company intends to submit a new application to the FDA for a
technologically similar device to The Wand(TM), specifically designed to address
the need to deliver widely varying volumes of anesthetic and other medicaments
for various medical disciplines. A working prototype device for delivery of
multi-volume anesthetic and other medicaments has been developed. Also, the
Company will continue to develop product enhancements and improvements. The
raising of additional capital to fund these efforts will continually be
evaluated by management.

      Private Placements

      The Company completed two private placements in 1997, receiving an
aggregate $13,505,961. In September 1997, the Company sold, in a private
placement, an aggregate of 1,666,666 units at $6.00 per unit for net cash
proceeds of $9,912,196, less non cash costs for warrants issued to counsel in
connection with the private placement of $174,999 for a net amount of
$9,737,197. Each unit consisted of one share of common stock at $6.00 and one
warrant to purchase one share at an exercisable price of $9.00 per share. Each
warrant entitles the holder to purchase one share of Common Stock for two years
from the closing of the offering. In addition, the Company issued to its counsel
warrants to purchase 83,333 units, exercisable at $6.00 per unit, each unit
consisting of one share of Common Stock and a warrant to purchase one share of
Common Stock at an exercise price of $9.00. Since such private placement,
warrants for 396,700 shares issued in the private placement have been exercised
providing the Company with additional proceeds of $3,570,300. This includes
108,700 warrants issued in 1998 which resulted in $978,300.

      In March 1997, the Company sold, in a private placement, an aggregate of
852,262 units at $4.72 per unit for net cash proceeds of $3,309,265, less non
cash costs for shares issued in connection with the private placement of
$1,316,350 for a net amount of $1,992,915. Each unit consisted of one share of
Common Stock and one Common Stock purchase warrant. Each warrant entitles the
holder to purchase one share of Common Stock for three years from the closing of
the offering at an exercise price of $4.72 per share. In addition, the placement
agent received warrants to purchase 85,226 units at $4.72 per unit. Since such
private placement, warrants for 730,257 shares issued in the private placement
have been exercised providing the Company with additional proceeds of
$3,446,813. This includes 10,891 warrants issued in 1998 which resulted in
$51,405.


                                       21
<PAGE>

      In March 1999, the Company received $2 million from an institutional
private placement with Cumberland Partners, other investment funds managed by or
affiliated with Cumberland Associates and certain principals of Cumberland
Associates. An additional $250,000 was raised from Leonard Osser, Chairman and
Chief Executive Officer of Milestone, under the same terms and conditions. The
investors purchased, at face value, 3% Senior Convertible Notes Due 2003,
convertible into Milestone Common Stock at prices increasing from $2.50 per
share in the first year to $6.00 per share in the fourth year, subject to
anti-dilution protection in the event of stock dividends and certain capital
changes. The shares underlying the Notes will be registered by Milestone and the
purchasers of the Notes have been granted rights to participate in certain
future security offerings by Milestone.

Year 2000 Compliance

      The Company has developed a plan to insure its operating systems are
compliant with the requirements to process transactions in the year 2000. This
plan includes the upgrade of its internal information systems which the Company
believes will not entail significant costs related to these upgrades. The
Company believes it will not incur significant costs for overall compliance with
Year 2000 issues. Also, the Company has reviewed its own equipment and
determined that the equipment is either Year 2000 compliant or not affected by
the Year 2000 issues.

      The Company is in the process of contacting its vendors, on whom it
relies, to assure that their systems are or will be Year 2000 compliant.
Responses are evaluated so as to ensure that critical vendors are Year 2000
compliant. Also, the Company is developing contingency plans to address the most
likely worst case scenarios from potential Year 2000 disruptions.

      The Year 2000 compliance effort is ongoing and will continue to develop as
new information becomes available.

Item 7. Financial Statements

      The financial statements of the Company required by this item are set
forth beginning on page F-1.

Item 8. Change in and Disagreements with Accountants on Accounting Financial
        Disclosure

            Not applicable


                                       22
<PAGE>

                                    PART III

Incorporated by reference to a Definitive Proxy Statement to be filed not later
than 120 days after the end of the fiscal year covered by this report

Item 13. Exhibits and Reports on Form 8-K.

(a)   Certain of the following exhibits were filed as Exhibits to the
      registration statement on form SB-2, Registration No. 33-92324 and
      amendments thereto (the "Registration Statement") filed by the Registrant
      under the Securities Act of 1933, as amended, or the reports filed under
      the Securities and Exchange Act of 1934, as amended, and are hereby
      incorporated by reference.

      Exhibit
        No.              Description
      -------            -----------

      3.1         Certificate of Incorporation of the Company. (1)

      3.2         Certificate of Amendment filed July 13, 1995. (2)

      3.3         Certificate of Amendment filed October 31, 1996. (5)

      3.4         Certificate of Amendment filed December 11, 1997. (6)

      3.5         By-laws of the Company. (1)

      4.1         Specimen Stock Certificate. (2)

      10.1        Lease dated November 25, 1996 between Livingston Corporate
                  Park Associates, L.L.C. and the Company. (5)

      10.4        Form of Underwriter's Warrant. (2)

      10.5        Financial Advisory and Investment Banking Agreement entered
                  into July 1, 1996 between GKN Securities Corp. and the
                  Company. (5)

      10.8        Employment Agreement dated November 1, 1996 by and between the
                  Company and Gregory Volok. (5)

      10.9        Lease, as amended, dated November 6, 1991 between Raybec
                  Management Co. and Wisdom. (5)

      10.10       Employment Agreement made as of December 23, 1996 by and
                  between Sagacity I, Inc. and Joel D. Warady. (5)

      10.13       Agreement for SDS Product dated September 1, 1996 between
                  Spintech and Princeton PMC. (5)

      10.14       Agreement for The Wand Product dated September 1, 1996 between
                  Spintech and Princeton PMC. (5)


                                       23
<PAGE>

      10.16       Exclusive Distributorship Agreement between Wisdom
                  Toothbrushes Limited and Sagacity I, Inc. (5)

      10.18       Agreement between Milestone and Spintech dated September 21,
                  1994 and Amendment No. 1 thereto. (2) 10.19 Employment
                  Agreement between the Company and Leonard Osser dated January
                  1, 1998. (6)

      21.1        Subsidiaries of the Registrant. (5)

      23          Consent of Grant Thornton, L.P.P.

      ----------
      (1) Filed with the initial filing of the Company's Registration
          Statement.
      (2) Filed with Amendment No. 1 to the Registration Statement.
      (3) Filed with Form 8-K dated January 29, 1996.
      (4) Filed with the Company's Form 10-KSB for the year ended December 31,
          1995.
      (5) Filed with the Company's Form 10-KSB for the year ended December 31,
          1996.
      (6) Filed herewith.

(b)   There were no reports on Form 8-K filed by the Registrant during the last
      quarter of the period covered by this report.


                                       24
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       Milestone Scientific Inc.

                                       By: /S/ Leonard Osser
                                           ------------------------------------
                                           Leonard Osser,
                                           Chairman and Chief Executive Officer

Date: March 31, 1999

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on March
31, 1999.

         Signature           Date                 Title
         ---------           ----                 -----

/s/Leonard Osser             March 31, 1999    Chairman, and Chief Executive 
--------------------------                     Officer
         Leonard Osser

/s/Thomas M. Stuckey         March 31, 1999    Vice President and Chief 
--------------------------                     Financial Officer
         Thomas M. Stuckey

/s/Daniel R. Martin          March 31, 1999    Director
--------------------------
         Daniel R. Martin

/s/David Sultanik            March 31, 1999    Director
--------------------------
         David Sultanik

/s/Stephen A. Zelnick        March 31, 1999    Director
--------------------------
       Stephen A. Zelnick

/s/Louis Margolis            March 31, 1999    Director
--------------------------
          Louis Margolis

/s/Larry Haimovitch          March 31, 1999    Director
--------------------------
         Larry Haimovitch

/s/Leonard Schiller          March 31, 1999    Director
--------------------------
         Leonard Schiller

/s/Paul Gregory              March 31, 1999    Director
--------------------------
         Paul Gregory


                                       25
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
  Milestone Scientific Inc.

We have audited the accompanying consolidated balance sheet of Milestone
Scientific Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Milestone
Scientific Inc. and Subsidiaries as of December 31, 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.

GRANT THORNTON LLP

New York, New York
March 10, 1999


                                      F-1
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                               ASSETS                       1997            1998
                                                        ------------    ------------
<S>                                                     <C>             <C>         
CURRENT ASSETS
    Cash and cash equivalents                           $  9,775,019    $    316,706
    Investments - Treasury Bills                           5,778,369       3,267,940
    Accounts receivable, net of allowance for
       doubtful accounts of $650,080 and
       $137,870 in 1997 and 1998, respectively               318,147         430,907
    Inventories                                            1,249,628       1,255,262
    Prepaid expenses                                          97,779         127,263
                                                        ------------    ------------

           Total current assets                           17,218,942       5,398,078

PROPERTY AND EQUIPMENT, NET                                  762,882       2,031,870

PATENTS, NET                                               1,980,834       1,736,275

OTHER ASSETS                                                  33,406          29,997
                                                        ------------    ------------

                                                        $ 19,996,064    $  9,196,220
                                                        ============    ============

    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Line of credit - bank                               $    175,000    $    150,000
    Accounts payable                                       1,053,955         544,705
    Accrued expenses                                         247,433         165,302
                                                        ------------    ------------

           Total current liabilities                       1,476,388         860,007
                                                        ------------    ------------

STOCKHOLDERS' EQUITY
    Common stock, par value $.001; authorized,
       25,000,000 shares; issued and outstanding,
       8,661,866 shares in 1997 and issued 
       8,817,882 in 1998                                       8,662           8,818
    Additional paid-in capital                            28,685,483      30,111,734
    Accumulated deficit                                  (10,174,469)    (20,872,823)
    Treasury stock, at cost, 100,000 shares                                 (911,516)
                                                        ------------    ------------

                                                          18,519,676       8,336,213
                                                        ------------    ------------

                                                        $ 19,996,064    $  9,196,220
                                                        ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-2
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                              1997            1998
                                                          ------------    ------------
<S>                                                       <C>             <C>         
Revenues                                                  $  2,854,271    $  8,804,235
Cost of sales                                                1,857,465      10,144,796
                                                          ------------    ------------

         Gross profit (loss)                                   996,806      (1,340,561)
                                                          ------------    ------------

Selling, general and administrative expense                  5,550,719       9,336,445
Research and development expense                               981,078         436,024
Compensation - Princeton PMC purchase                        2,126,670              --
                                                          ------------    ------------

                                                            (8,658,467)     (9,772,469)
                                                          ------------    ------------

         Loss from operations                               (7,661,661)    (11,113,030)
                                                          ------------    ------------

Other income
    Interest income (net of interest expense)                  220,877         414,676
    Other                                                        2,667              --
                                                          ------------    ------------

                                                               223,544         414,676
                                                          ------------    ------------

         NET LOSS                                         $ (7,438,117)   $(10,698,354)
                                                          ============    ============

Loss per common share - basic and diluted                       $(1.21)         $(1.22)
                                                                ======          ======

Weighted average shares outstanding - basic and diluted      6,130,488       8,736,537
                                                          ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
                                                              Additional
                                            Common stock        paid-in      Treasury     Accumulated      Unearned
                                          Shares    Amount      capital        stock         deficit     compensation      Total
                                        ---------   ------   ------------    ---------    ------------    ---------    ------------
<S>                                     <C>         <C>      <C>             <C>          <C>             <C>          <C>         
Balance, December 31, 1996              4,633,350   $4,633   $  6,819,341                 $ (2,736,352)   $(130,040)   $  3,957,582

March private placement of units          852,262      852      1,992,063                                                 1,992,915
Compensation expense                                                                                        130,040         130,040
Shares issued for capital assets           12,000       12         80,238                                                    80,250
Shares issued to consultants               58,000       58        369,692                                                   369,750
Shares issued in connection with 
   conversion offer to minority 
   shareholders of Spintech                23,755       24        166,658                                                   166,682
September private placement of units    1,666,666    1,667      9,735,530                                                 9,737,197
Warrants exercised                      1,255,933    1,256      6,599,476                                                 6,600,732
Warrants issued to consultants                                    807,219                                                   807,219
Shares issued in connection with
   Princeton PMC purchase                 159,900      160      2,126,510                                                 2,126,670
Costs associated with registering 
   shares                                                         (11,244)                                                  (11,244)
Net loss for the year ended 
   December 31, 1997                                                                        (7,438,117)                  (7,438,117)
                                        ---------   ------   ------------                 ------------    ---------    ------------

Balance, December 31, 1997              8,661,866    8,662     28,685,483                  (10,174,469)          --      18,519,676
                                        ---------   ------   ------------                 ------------    ---------    ------------

Shares repurchased                                                           $(911,516)                                    (911,516)
Warrants exercised                        119,591      120      1,029,585                                                 1,029,705
Options exercised                          36,425       36        175,214                                                   175,250
Warrants/options issued to 
   consultants                                                    221,452                                                   221,452
Net loss for the year ended 
   December 31, 1998                                                                       (10,698,354)                 (10,698,354)
                                        ---------   ------   ------------    ---------    ------------    ---------    ------------

Balance, December 31, 1998              8,817,882   $8,818   $ 30,111,734    $(911,516)   $(20,872,823)   $            $  8,336,213
                                        =========   ======   ============    =========    ============    =========    ============
</TABLE>

The accompanying notes are an integral part of this statement.


                                      F-4
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                1997            1998
                                                            ------------    ------------
<S>                                                         <C>             <C>          
Cash flows from operating activities
    Net loss                                                $ (7,438,117)   $(10,698,354)
    Adjustments to reconcile net loss to net cash used in
      operating activities
        Patent amortization                                      235,195         244,559
        Depreciation                                              71,935         336,002
        Loss on impairment of fixed assets                                     1,982,321
        Loss on write-down of inventory                                        1,243,986
        Compensation expense                                     450,660         221,452
        Compensation - Princeton PMC purchase                  2,126,670
        Bad debt expense                                          25,830
        Changes in assets and liabilities, net of effects
          from acquisition of businesses
              Increase in accounts receivable                    (20,231)       (112,760)
              Increase in inventories                           (740,901)     (1,249,620)
              Increase in prepaid expenses                       (76,991)        (29,484)
              (Increase) decrease in other assets                 (2,707)          3,409
              Increase (decrease) in accounts payable            570,418        (509,250)
              Increase (decrease) in accrued expenses            145,123         (82,131)
              Decrease in deferred revenue                       (38,517)
                                                            ------------    ------------
       Net cash used in operating activities                  (4,691,633)     (8,649,870)
                                                            ------------    ------------
Cash flows from investing activities
    Purchase of Treasury Bills                                (9,678,369)     (5,520,000)
    Sale of Treasury Bills                                     3,900,000       8,030,429
    Acquisition costs of minority interest in Spintech            (9,532)
    Capital expenditures                                        (473,189)     (3,587,311)
                                                            ------------    ------------
       Net cash used in investing activities                  (6,261,090)     (1,076,882)
                                                            ------------    ------------
Cash flows from financing activities
    Net proceeds from private placements                      13,258,895
    Net proceeds from issuance of common stock                 6,600,732
    Proceeds from borrowings                                     100,000
    Repayment of borrowings                                                      (25,000)
    Costs associated with registering shares                     (11,244)
    Purchase of treasury stock                                                  (911,516)
    Proceeds from exercise of warrants and options                             1,204,955
                                                            ------------    ------------

       Net cash provided by financing activities              19,948,383         268,439
                                                            ------------    ------------

       NET INCREASE (DECREASE) IN CASH AND
          CASH EQUIVALENTS                                     8,995,660      (9,458,313)

Cash and cash equivalents at beginning of year                   779,359       9,775,019
                                                            ------------    ------------

Cash and cash equivalents at end of year                    $  9,775,019    $    316,706
                                                            ============    ============
</TABLE>


                                      F-5
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                             Year ended December 31,

                                                               1997        1998
                                                             -------     -------

Supplemental disclosures of cash flow information:
   Cash paid during the year for
     Interest                                                $24,277     $15,376
                                                             =======     =======

Supplemental schedule of noncash investing and financing activities:

In 1997, 58,000 shares of common stock were issued for services performed
associated with the 1997 private placement. The value of the above shares
($369,750) , deferred financing and other costs incurred in 1996 was applied
against the net proceeds in 1997.

In 1997, 12,000 shares of common stock, measured at fair value of $80,250, were
issued in exchange for capital assets.

In 1997, 23,755 shares of common stock were issued in exchange for approximately
1,017 shares of Spintech common stock (approximately 1%). The value of the
stock, $166,682, and associated legal costs at date of acquisition is included
in patents.

In 1997, the Company issued warrants to consultants and placement agents for
consulting services. Those warrants have been measured at fair value, with
$320,620 being charged to compensation expense and $486,599 being charged
against the proceeds from the two private placements.

In 1998, 7,425 warrants were issued to a former board member for services
rendered as such, which were also exercised during 1998 in a cashless
conversion. Accordingly, the Company recognized a total noncash charge of
$95,000 as compensation expense for the fair value of the warrants issued and
exercised.

The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 1997 and 1998

NOTE A - REALIZATION OF ASSETS

      The accompanying financial statements have been prepared in conformity
      with generally accepted accounting principles, which contemplate
      continuation of the Company as a going concern. The Company has sustained
      substantial losses from the operations after the introduction of its Wand
      product, and has experienced significant returns of this product, as well
      as significant decreases in sales during 1998. In addition, the Company
      has used rather than provided, cash in its operations during the year
      ended December 31, 1998.

      In view of the matters described in the preceding paragraph,
      recoverability of a major portion of the recorded asset amounts shown in
      the accompanying balance sheet is dependent upon continued operations of
      the Company, which in turn is dependent upon the success of the Company's
      Wand product. The financial statements do not include any adjustments
      relating to the recoverability and classification of recorded assets
      amounts or amounts and classification of liabilities that might be
      necessary should the Company be unable to continue in existence.

      Based on management's belief that The Wand(TM), is a major advance in
      dentistry and may ultimately become the accepted method for delivering
      local dental anesthesia, the Company is taking steps that are aimed at
      growing and strengthening the end user base, thereby gaining greater
      acceptance of the Wand and increasing revenue through higher disposable
      handpiece usage. These steps include a) expanding its market overseas, b)
      obtaining feedback and providing further support to current Wand users, c)
      increasing the number of dental schools which include The Wand(TM) in
      their curriculum, d) distributing The Wand(TM) technique videos and
      technical bulletins to its current users, e) conducting direct-to-patient
      advertising with specialized sales effort in test markets, and f)
      maintaining a well-trained service staff.

      As of December 31, 1998, the Company had approximately $3.6 million in
      aggregate cash, cash equivalents and Treasury bills. In addition, during
      March 1999, the Company received $2,250,000 from the sale of senior
      convertible notes (Note O). Management believes that through the proper
      utilization of these existing funds, and the expense reductions achieved
      through cost containment programs, the Company will have sufficient cash
      to meet its needs for the next twelve months.


                                      F-7
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE A (continued)

      Subsequent to year-end, the Company achieved two major objectives in its
      international marketing effort. In January 1999, The Wand(TM) was approved
      under the Medical Device Directive 93/42/EEC, a requirement for all dental
      and medical devices distributed throughout the European Union. This
      authorizes the Company to apply the CE mark to the product. In February
      1999, the Company entered into an agreement for the international
      distribution by the Den-X dental division of Automatic Film Processing
      ("AFP") of The Wand(TM), through the international distribution network
      previously established by AFP for its dental and medical imaging products,
      intraoral video cameras, digital X-ray systems and other dental products.
      Under the agreement, Milestone would continue to be responsible for
      distribution of The Wand(TM) in the United States, Canada, China, Hong
      Kong and Taiwan. AFP would assume certain existing international
      distribution arrangements previously established by Milestone in South
      Africa, Israel and certain other countries. AFP has an extensive network
      of foreign distributors and representatives. AFP is a medical and dental
      imaging equipment supplier whose products are applied in medical and
      dental diagnostics.

      The Company intends to submit a new application for a technologically
      similar device to The Wand(TM), specifically designed to address the need
      to deliver widely varying volumes of anesthetic and other medicaments for
      various medical disciplines. A working prototype device for delivery of
      multi-volume anesthetic and other medicaments has been developed. Also,
      the Company will continue to develop product enhancements and
      improvements. The raising of additional capital will continually be
      evaluated by management.

      The Company's policy is to continually evaluate the recoverability of its
      assets in accordance with generally accepted accounting principles. As a
      result of continued decreases in sales and increases in returns during the
      fourth quarter of 1998 and the first quarter of 1999, the Company
      determined that an impairment of certain assets had occurred. Accordingly,
      the Company recorded noncash charges of approximately $1,244,000 and
      $1,982,000 relating to writedowns established for its inventory and
      equipment, respectively. The inventory writedown was based on the
      Company's estimate of the amount it did not expect to be recoverable from
      future sales. The property and equipment writedown was determined on the
      difference between the carrying value of certain tooling equipment for the
      Wand and its fair value based upon the future cash flow from the Wand.


                                      F-8
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Organization of Business

      Milestone Scientific Inc. (formerly U.S. Opportunity Search, Inc.) (the
      "Company") was incorporated in the State of Delaware in August 1989. The
      Company develops, manufactures, markets and sells equipment and related
      disposable or consumable items and other products for use primarily by the
      dental practitioner in the United States.

      In November 1995, the Company purchased 65% of the common stock of
      Spintech, Inc. ("Spintech"). (See Note D.) Spintech was founded to perform
      research and to develop patented products for use by health care
      providers. Spintech has had only limited sales of its products. These
      limited sales provide no assurance that Spintech will be able to
      successfully market these products and that demand will be at the levels
      at which Spintech can operate profitably.

      In March 1996, the Company, together with one of its officers, founded
      Princeton PMC, Inc. ("Princeton PMC") as a marketing company. The Company
      acquired the remaining outstanding shares of Princeton PMC, Inc. common
      stock owned by the officer in November 1996, making Princeton PMC, Inc. a
      wholly-owned subsidiary. In December 1996, the Company acquired Sagacity
      I, Inc. ("Sagcity"), doing business in the United States as the Wisdom
      Toothbrush Co. ("Wisdom"), and obtained United States distribution rights
      to the Wisdom line of toothbrushes and prophylaxis products (see Note D).
      Wisdom had an exclusive three-year distributor agreement in the United
      States, Canada and other areas with Wisdom Toothbrushes Limited ("Wisdom
      UK"). This agreement was mutually terminated in March 1998.

      In Dember 1997; In addition to doing business as Wisdom, Sagacity
      commenced doing business in the United States as Milestone Scientific,
      Inc. ("Milestone").


                                      F-9
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE B (continued)

      A summary of the significant accounting policies consistently applied in
      the preparation of the accompanying financial statements follows:

      1.    Principles of Consolidation

            The consolidated financial statements include the accounts of the
            Company and all of its wholly-owned and majority-owned subsidiaries.
            All material intercompany accounts and transactions have been
            eliminated. The operating results of Spintech have been included in
            the Company's consolidated financial statements since November 1995,
            the date of acquisition; the operating results of Princeton PMC have
            been included since its formation in March 1996; and the operating
            results of Wisdom have been included since December 1996, the date
            of acquisition.

      2.    Cash and Cash Equivalents

            For purposes of the statements of cash flows, the Company considers
            all highly liquid investments purchased with a maturity of three
            months or less to be cash equivalents.

      3.    Investments - Treasury Bills

            The Company carries its Treasury Bills at cost plus accrued
            interest, which approximates fair value.

      4.    Inventories

            Inventories are valued at the lower of cost or market with cost
            being determined by the first-in, first-out ("FIFO") method.
            Inventories principally consist of finished goods.


                                      F-10
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE B (continued)

      5.    Property and Equipment

            Property and equipment are stated at cost and depreciated using
            straight-line and accelerated methods over the estimated useful
            lives of the assets. The estimated useful lives to be used to
            determine depreciation are as follows:

                  Furniture and fixtures                    7 years
                  Office equipment                          5 years
                  Trade show displays                       5 years
                  Tooling equipment                     5 - 7 years
                  Computer and software                     3 years

      6.    Patents

            The excess of the Company's cost over the tangible net assets of
            Spintech has been allocated to patents and is being amortized over a
            ten-year period using the straight-line method. The recoverability
            of the carrying values of the patents are evaluated on a recurring
            basis.

      7.    Revenue Recognition

            The Company recognizes revenue from sales when title to merchandise
            passes to customers, including distributors.

      8.    Research and Development

            Research and development costs are expensed as incurred.

      9.    Loss Per Common Share

            Loss per common share is computed based on the weighted average
            number of shares of common stock outstanding. The effect on the loss
            per share of warrants and options outstanding is antidilutive and
            has not been included in the calculation of weighted average shares
            outstanding. (See Note F for additional information.)


                                      F-11
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE B (continued)

      10.   Use of Estimates in Financial Statements

            In preparing financial statements in conformity with generally
            accepted accounting principles, management makes estimates and
            assumptions that affect the reported amounts of assets and
            liabilities and disclosures of contingent assets and liabilities at
            the date of the financial statements, as well as the reported
            amounts of revenues and expenses during the reporting period. Actual
            results could differ from those estimates.

      11.   Product Sales

            During 1997 and 1998 the Company had the following domestic product
            sales which comprises its total sales in the accompanying financial
            statements:

                                                             1997         1998
                                                         ----------   ----------

            Wand System Kits and Handpieces              $6,622,000             
            Wisdom products                               2,182,235   $2,854,271
                                                         ----------   ----------
                                                         
                                                         $8,804,235   $2,854,271
                                                         ==========   ==========

NOTE C - PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at December 31:

                                                             1997         1998
                                                         ----------   ----------

            Furniture and fixtures                       $       --   $  174,914
            Office equipment                                     --      191,200
            Trade show displays                             358,955      116,583
            Tooling equipment                                93,467    1,978,434
            Computers and software                          405,833       24,097
                                                         ----------   ----------
                                                         
                                                            858,255    2,485,228
                                                         
            Less accumulated depreciation                    95,373      504,394
                                                         ----------   ----------
                                                         
                                                         $  762,882   $1,980,834
                                                         ==========   ==========


                                      F-12
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE D - ACQUISITIONS

      Princeton PMC

      In March 1996, the Company, together with one of its officers, entered
      into a shareholders' agreement to form Princeton PMC, a corporation, and
      to engage in the marketing and sales of dental products. The Company
      contributed $85,000 for 200 shares of this entity representing a
      two-thirds ownership.

      In November 1996, the Company purchased the remaining one-third of
      Princeton PMC's outstanding stock for 100 shares of its common stock plus
      a contingent obligation as described below. The acquisition has been
      recorded using the purchase method of accounting. The purchase price
      approximated the net tangible assets acquired. The operating results of
      Princeton PMC have been included in the Company's consolidated financial
      statements as follows: two-thirds through October 1996 and 100%
      thereafter. In connection with the acquisition of Princeton PMC,
      additional shares of common stock could be issued to the officer depending
      upon the Company's average earnings over the next two years as defined.
      The Company is obligated to issue 159,900 shares of its common stock if
      certain income levels are achieved. The shares issued to the officer would
      result in compensation expense.

      In December 1997, the Company waived the earnings requirement and
      authorized the issuance of the 159,900 shares of common stock. The value
      of the stock was charged as "Compensation - Princeton PMC purchase" in the
      statement of operations.

      Wisdom

      In December 1996, the Company completed the purchase of Wisdom's
      outstanding stock by issuing 23,250 shares of its common stock valued at
      $110,437. The acquisition has been recorded using the purchase method of
      accounting. The cost was less than the subsidiary's net assets at the date
      of acquisition. The excess of net assets over cost has been applied to
      reduce the amounts assigned to noncurrent assets of the subsidiary. The
      operating results of Wisdom have been included in the Company's
      consolidated financial statements since the date of acquisition.


                                      F-13
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE D (continued)

      Spintech

      In November 1995, the Company completed the purchase of 65% of Spintech's
      outstanding stock on a fully diluted basis for $2,700,000. The Company
      paid $2,026,495, which represents the $2,700,000 less amounts advanced to
      Spintech amounting to $632,500 plus interest of $41,005. The acquisition
      has been recorded using the purchase method of accounting. The excess of
      the aggregate purchase price over the net tangible assets acquired was
      allocated to patents and is being amortized over ten years. The operating
      results of Spintech have been included in the Company's consolidated
      financial statements since the date of acquisition. The minority interest
      has been valued at zero as of December 31, 1997 and 1998.

      The Company also holds a series of annual options to purchase, for a
      nominal amount, an additional 3% of Spintech's outstanding shares
      following each of the first five fiscal years commencing after the closing
      of the stock purchase (or an aggregate of 15% of such shares if all of the
      options are exercised). Each option is exercisable only if Spintech does
      not achieve a specified pretax profit target as defined in the applicable
      fiscal year. As a result of Spintech not achieving the specified pretax
      profit in 1996, the Company exercised its option in 1997. In addition, the
      Company provides advances to Spintech. These advances are due on demand
      with interest at 8%.

      On several occasions, during 1997, the Company offered, to those minority
      shareholders of Spintech who are accredited investors, the opportunity to
      exchange their Spintech shares for Milestone. The conversion offer ranged
      from 6.1 to 24.43 shares of Milestone for 1 share of Spintech. These
      offers were for restricted shares. As of December 31, 1997, 1,017 shares
      of Spintech were converted, which, together with the above exercise,
      increased Milestone's ownership of Spintech to 70.3%. The option exercised
      in 1998 increased the Company's ownership in Spintech to 73.4%. The value
      of the converted shares and associated offering costs are reflected in the
      accompanying balance sheet as patents.

NOTE E - LINE OF CREDIT - BANK

      Sagacity has a $250,000 line of credit with a bank with interest at the
      bank's prime rate plus 1%. The line is collateralized by substantially all
      assets of Wisdom. Advances under the line are in the form of demand notes.


                                      F-14
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE F - STOCKHOLDERS' EQUITY

      In September 1997, the Company sold, in a private placement, an aggregate
      of 1,666,666 units at $6.00 per unit for net cash proceeds of $9,912,196,
      less noncash costs for warrants issued to counsel in connection with the
      private placement of $174,999, for a net amount of $9,737,197. Each unit
      consisted of one share of common stock at $6.00 and one warrant to
      purchase one share at an exercisable price of $9.00 per share. Each
      warrant entitles the holder to purchase one share of common stock for two
      years from the closing of the offering. In addition, the Company issued to
      its counsel warrants to purchase 83,333 units, exercisable at $6.00 per
      unit, each unit consisting of one share of common stock and a warrant to
      purchase one share of common stock at an exercise price of $9.00. As of
      December 31, 1998, 1,269,966 warrants were outstanding.

      In March 1997, the Company sold, in a private placement, an aggregate of
      852,262 units at $4.72 per unit for net cash proceeds of $3,309,265, less
      noncash costs for shares and warrants issued in connection with the
      private placement of $1,316,350 for a net amount of $1,992,915. Each unit
      consisted of one share of common stock and one common stock purchase
      warrant. Each warrant entitles the holder to purchase one share of common
      stock for three years from the closing of the offering at an exercise
      price of $4.72 per share. In addition, the placement agent received
      warrants to purchase 85,226 units at $4.72 per unit. As of December 31,
      1998, 122,005 warrants were outstanding.

      During 1996 and 1997, the Company granted stock options to a director and
      various consultants to purchase 35,000 and 164,000 shares of common stock,
      respectively, at prices ranging from $5.125 to $6.50 per share. The
      options expire in three to five years depending on the option, vest over
      two to three years and contain certain antidilution provisions. All
      options were unexercised at December 31, 1998. The options issued to the
      consultants in 1997 were measured at fair value of $320,620 and were
      charged to compensation expense.

      The Company has issued 130,000 shares to certain directors in
      consideration for their agreement to serve on the Advisory Board of the
      Board of Directors for at least two years. If any member fails to serve
      his term, except because of death or disability, his shares will be
      returned to the Company for cancellation. The market value of the shares
      issued was $520,000. This amount was recorded as unearned compensation and
      is shown as a separate component of stockholder's equity. Unearned
      compensation was amortized to expense over a four-year period ending in
      December 1997. Such amortization amounted to $130,040 for the year ended
      December 31, 1997.


                                      F-15
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE F (continued)

      During 1996, the Company issued 60,000 shares to a consultant for services
      provided to the Company. The agreement stipulates that if the consultant
      is permitted to sell and does sell the shares issued to him and realizes
      from such sale net proceeds of less than $5 per share, the Company shall
      supplement such proceeds up to $5 per share, provided the Company's total
      obligation shall not exceed $105,000.

      Stock Option Plan

      In 1997, the Board of Directors approved the adoption of the 1997 Stock
      Option Plan. The 1997 Stock Option Plan provides for the grant of options
      to purchase up to 500,000 shares of the Company's common stock. Options
      may be granted to employees, officers, directors and consultants of the
      Company for the purchase of common stock of the Company at a price not
      less than the fair market value of the common stock on the date of the
      grant. In general, options become exercisable over a three-year period
      from the grant date and expire five years after the date of grant.

      Stock-Based Compensation

      The Company has elected to follow Accounting Principles Board Opinion No.
      25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
      interpretations in accounting for its stock options. Under APB No. 25,
      because the exercise price of the Company's employee stock options equals
      the market price of the underlying stock on the date of grant, no
      compensation expense is recognized. However, SFAS No. 123, "Accounting for
      Stock-Based Compensation," requires presentation of pro forma net income
      and earnings per share as if the Company had accounted for its employee
      stock options granted subsequent to December 31, 1994, under the fair
      value method of that statement. For purposes of pro forma disclosure, the
      estimated fair value of the options is amortized to expense over the
      vesting period. Under the fair value method, the Company's net loss and
      loss per share would have been increased by the amounts that follow:


                                      F-16
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE F (continued)

                                                             1997        1998
                                                           --------   ----------

            Net loss                                       $405,000   $1,103,000
            Loss per common share                          $    .07   $      .13
                                                   
      Because SFAS No. 123 is applicable only to options granted subsequent to
      December 31, 1994, and some options have a two- to three-year vesting
      period, the pro forma effect will not be fully reflected until 2000.

      The weighted-average fair value of the individual options granted during
      1997 and 1998 was estimated as $2.78 and $15.25, respectively, on the date
      of grant. The fair value for 1997 and 1998 was determined using a
      Black-Scholes option-pricing model with the following assumptions:

                                                     1997           1998
                                                 -----------     ---------

            Dividend yield                          --            --
            Volatility                              52.74%       126.13%
            Risk-free interest rate                  6.34          5.60
            Forfeiture rate                         --            --
            Expected life                        3 - 5 years     3-5 years

      Stock option activity during 1997 - 1998 is summarized below:

<TABLE>
<CAPTION>
                                             Shares of common        Weighted-average
                                           stock attributable to     exercise price of
                                           options and warrants    options and warrants
                                           --------------------    --------------------
<S>                                             <C>                       <C>   
            Unexercised at December 31, 1996       535,000                $ 6.11
            Granted                              3,240,487                  7.24
            Exercised                           (1,371,366)                 6.04
            Forfeited                                   --                    --
                                                ----------                                             
            Unexercised at December 31, 1997     2,404,121                  7.67
                                                ==========                
                
            Granted                                272,000                 18.60
            Exercised                             (156,016)                 8.30
            Forfeited                             (152,575)                11.36
                                                ----------                                             
            Unexercised at December 31, 1998     2,367,530                
                                                ==========                
</TABLE>


                                      F-17
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE F (continued)

      The following table summarizes information concerning outstanding and
      exercisable options at December 31, 1998:

                                                            Options and warrants
                      Options and warrants outstanding          exercisable
                  --------------------------------------    --------------------
                                 Weighted-
                                  average      Weighted-               Weighted-
                                 remaining      average                 average
                    Number      contractual    exercise                exercise
Exercise prices   outstanding   life (years)     price       Number      price
---------------   -----------   ------------   ---------     ------    ---------

  1.563                5,000        5           $1.563
  4.720              207,231        3            4.720        207,23    $4.720
  5.125              192,000        3            5.125       151,998     5.125
  5.375               75,000        2            5.375        75,000     5.375
  5.750               50,000        4            5.750        16,666     5.750
  6.000               30,000        1            6.000        30,000     6.000
  6.500               73,000        4            6.500        34,332     6.500
  6.875               15,000        3            6.875        15,000     6.875
  7.000              106,500        4            7.000        35,500     7.000
  7.560               43,500        4            7.560        14,500     9.000
  9.000            1,353,299        3            9.000     1,353,299        --
 15.825              185,000        5           17.114            --        --
 23.00                32,000        5           23.000            --        --
                   ---------

                   2,367,530
                   =========

NOTE G - EMPLOYMENT CONTRACTS

      Milestone

      In January 1998, the Company entered into a five-year employment contract
      with the Company's Chief Executive Officer providing for an increase in
      annual base compensation from $265,000 to $350,000, plus stock options and
      cash bonuses based upon the achievement of certain net income levels of
      the Company. These income levels were not achieved in 1998, and,
      therefore, the additional compensation provisions of the contract were not
      in effect for 1998.


                                      F-18
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE G (continued)

      In November 1996, the Company entered into a five-year employment
      agreement with the Company's Executive Vice-President providing for annual
      compensation of $120,000. This agreement terminated upon the resignation
      of the executive in August 1998.

      Spintech

      Spintech had entered into an employment agreement with its former Director
      of Research for a five-year term beginning on November 10, 1995, at an
      initial salary of $110,000 per annum and increasing by 10% per year for
      each succeeding year throughout the term. The agreement also provided for
      the payment of up to a $500,000 bonus at the end of the employment term
      depending on the achievement of certain profit projections during his
      employment term. Its former Director of Research had demanded certain
      revisions to this agreement.

      On March 26, 1997, the Company commenced legal action against its former
      Director of Research. The Company seeks recovery of damages for
      interference with existing and prospective contract and business
      relationships, a declaratory judgment that the former Director of Research
      has no personal rights to certain technology developed while he was
      employed by Spintech and a declaratory judgment that, the Company has not
      breached the former Director of Research's employment agreement or the
      agreement for the purchase by the Company of a 65% equity interest in
      Spintech. His employment was terminated on April 9, 1997. (Note H)

      Wisdom

      In December 1996, Wisdom entered into a three-year employment agreement
      with its President for annual compensation of $105,000. In December 1998,
      the officer resigned, thereby terminating his agreement.


                                      F-19
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE H - LITIGATION

      Spinello

      On March 26, 1997, Milestone and Spintech commenced legal action in the
      United States District Court of New Jersey against Ronald Spinello, DDS,
      the former Chairman and Director of Research of Spintech. In the
      complaint, plaintiffs seek recovery of compensatory and punitive damages
      for extortion and tortious interference with existing and prospective
      contract and business relationships, a declaratory judgment that Dr.
      Spinello has no personal rights to certain technology developed while he
      was employed as Director of Research of Spintech relating to the design
      and production of ancillary components of its computer-controlled local
      anesthetic delivery system, a declaratory judgment that plaintiffs have
      not breached Dr. Spinello's employment agreement or the agreement for the
      initial purchase by Milestone of a 65% equity interest in Spintech and
      injunctive relief. On May 21, 1997, Dr. Spinello filed an answer and
      counterclaim which denies the material allegations of the complaint and
      seeks recovery for breach of the defendant's employment agreement,
      initiates a derivative action against Milestone with respect to various
      expenditures and actions for which Defendant, on behalf of Spintech, seeks
      an amount in excess of $75,000, alleges civil conspiracy against Milestone
      with respect to certain of those matters and the entry into the employment
      agreement with Defendant and seeks indemnification for expenses, including
      attorneys' fees, in the pending action. On May 25, 1997, the Company filed
      a reply to counterclaims which denied all of the material allegations of
      the counterclaims. On December 30, 1997, Dr. Spinello made a motion for
      leave to join as an additional Defendant on Counterclaim the Company's
      Chairman, Leonard Osser, and to file an amended Answer and Counterclaim
      against the Company. Both the Company and Mr. Osser opposed the motion
      and, in addition, the Company made a Cross-motion to dismiss certain
      claims asserted in the initial Answer and Counterclaim. The additional
      claims which Dr. Spinello sought to assert against the Company include a
      fraud in the inducement claim based upon the alleged failure of the
      Plaintiffs to advise Dr. Spinello of the legal effects of his employment
      agreement; and a civil conspiracy claim. Dr. Spinello also sought to add a
      jury demand through his amended pleading. The Company's Cross-motion
      sought to dismiss all of Dr. Spinello's claims, except his claim for
      unpaid salary, on the basis that his derivative claim is fatally defective
      because he did not make any demand upon Spintech, the entity on whose
      behalf he purports to bring suit, and his indemnification claim is fatally
      defective because the claims against him do not arise by reason of the
      fact that Dr. Spinello was an officer or director of Spintech.


                                      F-20
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE H (continued)

      On May 5, 1998, the United States Magistrate Judge issued a Report
      recommending that the Court grant Milestone's motions to dismiss the
      counterclaims brought by defendant Spinello for a shareholder's derivative
      action and civil conspiracy, finding that defendant Spinello had failed
      "to state a claim upon which relief may be granted." The Report also
      recommended that the Court dismiss defendant Spinello's counterclaim for
      indemnification against Milestone and a portion of the indemnification
      claim against Spintech. In a second decision, the Magistrate Judge denied
      defendant Spinello's motion to join Milestone's Chairman as an additional
      party and to file an amended answer asserting revised and additional
      counterclaims against Milestone and Spintech. The Magistrate Judge
      determined that defendant Spinello's proposed amended counterclaims "are
      futile and could not withstand a motion to dismiss under federal rule of
      civil procedure 12(b)(6)." Defendant Spinello timely filed an appeal from
      the May 5, 1998 Order and objections to the Report. On August 24, 1998, a
      United States District Judge for the District of New Jersey issued a
      memorandum opinion and signed an Order denying Dr. Spinello's appeal of
      the May 5, 1998 Order and affirming the May 5, 1998 Order in its entirety.
      The Judge further denied in its entirety Dr. Spinello's objections to the
      Report and granted the Company's motion to dismiss counts one, two, three
      and four of Dr. Spinello's initial Counterclaim.

      As a result of the affirmance of the May 1998 Order and the adoption of
      the Report granting the Company's motion to dismiss, the only claims
      remaining in the litigation with Dr. Spinello are Milestone's claims
      against Dr. Spinello and Dr. Spinello's counterclaim for unpaid salary for
      the period subsequent to his alleged wrongful termination, and a portion
      of his indemnification claim against Spintech.

      In October 1998, the Company received a settlement demand from Counsel for
      Dr. Spinello and Glenn Spinello which stated that, notwithstanding the
      United States District Judge's decision, substantial claims remain to be
      litigated and that there are substantial risks to Milestone from this
      litigation. The settlement demand letter, which was not accepted by the
      Company, does not describe the nature of any claims that Dr. Spinello
      could assert against the Company, but it does allude to potential
      litigation in other forums and the possibility of future litigation
      brought by minority stockholders of the Company.

      If Dr. Spinello does seek to assert additional claims, or if minority
      stockholders should assert claims, against the Company, the Company
      intends to vigorously defend such claims and believes that it has
      meritorious defenses thereto.


                                      F-21
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE H (continued)

      On March 5, 1999, the parties completed discovery. The parties are
      currently preparing various dispositive motions for summary judgment on
      certain of the issues remaining in the case. The motions are scheduled to
      be filed on or about April 15, 1999, with a return date of May 10, 1999.
      If the motions for summary judgment are granted, the Court will hold a
      trial on any remaining issues in late 1999. The Company believes that it
      has meritorious defenses to Dr. Spinello's claims and meritorious claims
      against Dr. Spinello.

      Milestone has been advised by its patent counsel that all technology
      developed by Dr. Spinello while employed by Spintech is owned by Spintech.
      The Company believes that ownership of the technology relating to these
      ancillary components which are the subject of this litigation in no way
      prevents the manufacture and sale of its anesthetic delivery system at
      economically viable prices.

      On May 20, 1997, Glenn R. Spinello filed a Complaint in the Court of
      Common Pleas, York County, Pennsylvania, seeking damages as a result of
      the alleged breach of his Employment Agreement. On June 20, 1997, the
      Company and Spintech filed a Notice of Removal which transferred venue of
      Glenn Spinello's lawsuit to the United States District Court for the
      Middle District of Pennsylvania. On June 27, 1997, the Company and
      Spintech filed an Answer to Glenn Spinello's Complaint which denied the
      material allegations of the Complaint and asserted counterclaims based
      upon Glenn Spinello's breach of his Employment Agreement. On July 27,
      1997, Glenn Spinello filed a reply to the counterclaims by the Company and
      Spintech, denying the material allegations of the counterclaims. On March
      16, 1999, the parties completed discovery. Although the case is scheduled
      for trial during the fall of the 1999 term, Glenn Spinello's attorney
      advised the Company's attorney that he intends to move for summary
      judgment. Any such motion must be filed by April 16, 1999. The Company
      intends to oppose such a motion and, if successful, proceed to trial. The
      Company believes it has meritorious defenses to Glenn Spinello's claims
      and meritorious counterclaims.


                                      F-22
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE H (continued)

      Class Action Lawsuit

      Several class action lawsuits have been commenced against the Company,
      certain present and former executive officers, one outside director and
      consultants in the United States District Court for the District of New
      Jersey. The District Judge before whom the cases are pending has entered
      an order consolidating all of the class actions into one consolidated
      action. The Complaints contain generally overlapping and similar
      allegations of violations of the Securities Exchange Act of 1934,
      including allegations that the Company and certain of the other defendants
      violated the Act by issuing false and misleading financial statements and
      disseminating misleading statements about, among other things, the demand
      for the Company's principal product, its expected sales growth, the
      acceptance of that product by dental professionals, shipments during
      certain time periods and misrepresentations of the third-party evaluations
      of the efficacy of the product through failure to disclose the issuance of
      stock options to certain consultants. On October 22, 1998, the District
      Judge entered an order appointing lead plaintiff to represent interests of
      all class members. Milestone believes that material allegations of the
      complaints lack merit and intends to vigorously defend the above actions.
      Specifically, Milestone believes that its financial statements presents
      fairly its results of operations, that the information which it has
      publicly disclosed does not contain any material misstatements or
      misrepresentations, and that stock options issued to persons who published
      research reports were issued for other services for the Company,
      principally service as spokespersons and demonstrators of the Company's
      product. Further, the Company continues to believe that The Wand(TM)
      embodies superior technology, is a major advance in dentistry and may
      ultimately become the accepted method for delivering local dental
      anesthesia.

      Derivative Action Lawsuit

      In February 1999, a purported owner of Milestone stock had commenced a
      derivative action on behalf of the Company, in the Court of Chancery of
      the State of Delaware in Newcastle County, against certain present and
      former executive officers and directors. In the action, plaintiff alleges
      that based on the same facts as the class actions described above, the
      defendants engaged in violations of the securities laws, committed fraud
      and securities fraud, wasted corporate assets and damaged the Company's
      reputation. As a derivative action, even if the plaintiff is successful,
      any award, after deduction of plaintiff's costs and disbursements, would
      be payable to the Company. Nevertheless, Milestone believes that the
      material allegations of the complaint lack merit and intend to provide a
      legal defense for its present and former officers and directors in
      accordance with the indemnification provisions of its Certificate of
      Incorporation.


                                      F-23
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE H (continued)

      Insurance Broker and Carrier

      In January 1999, the Company filed a complaint against its insurance
      broker (Frank Crystal Financial Services) and the two excess insurers
      (American Alliance and St. Paul) in the United States District Court for
      the District of New Jersey. American Alliance and St. Paul are currently
      in dispute with the Company because they claim that the Company did not
      timely submit the appropriate application. As a result, American Alliance
      refused to issue a policy and St. Paul, which issued a policy, has refused
      to cover the class actions described above. The Company believes that
      these excess carriers were required to issue excess insurance because it
      paid the premium on a timely basis. The premium was distributed to,
      deposited and kept by the insurers. In February 1999, the Company received
      and accepted, with certain reservations, the check from American Alliance
      covering its premium portion. The action is in its early stages.


                                      F-24
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE I - INCOME TAXES

      Deferred tax attributes resulting from differences between financial
      accounting amounts and tax bases of assets and liabilities at December 31,
      1997 and 1998 follow:

                                                       1997           1998
                                                   -----------    -----------

      Current assets and liabilities
          Allowance for doubtful accounts          $    11,000    $    64,000
          Inventory allowance                        1,015,000
          Other                                          4,500

      Valuation allowance                              (11,000)    (1,083,500)
                                                   -----------    -----------

      Net current deferred tax asset (liability)   $        --    $        --
                                                   ===========    ===========

      Noncurrent assets and liabilities
          Depreciation                             $   (13,000)   $  (213,000)
          Net operating loss carryforward            1,667,000      4,745,000
                                                   -----------    -----------

                                                     1,654,000      4,532,000
      Valuation allowance                           (1,654,000)    (4,532,000)
                                                   -----------    -----------

      Noncurrent deferred tax asset (liability)    $        --    $        --
                                                   ===========    ===========

      The valuation allowance has been established for those loss carryforwards
      and deductible temporary differences which are not presently considered
      more likely than not to be realized.

      The provision for income taxes differs from the effective tax rate used in
      the financial statements as a result of current year net operating losses,
      the benefit of which has not been recognized in the current year.

      As of December 31, 1998, the Company had net operating loss carryforwards
      of approximately $12,357,000, which expire in 2007 through 2018.


                                      F-25
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE I (continued)

      The utilization of loss carryforwards may be limited due to an ownership
      change as defined by Section 382 of the Internal Revenue Code.

      The Company and Spintech file separate Federal and State income tax
      returns.

NOTE J - LEASE COMMITMENTS

      Milestone Scientific

      In November 1996, the Company signed a five-year-and-one-month lease
      agreement for its corporate headquarters.

      Sagacity

      In November 1997, Wisdom extended its lease term for its facilities for
      one year and expanded its space. In addition, in March 1997, Wisdom signed
      a three-year lease agreement for its Telemarketing Department.

      In December 1998, Wisdom extended its lease term for half of its
      facilities for one year and the remainder, per the landlord's stipulation,
      on a monthly basis.

      The Company also leases equipment under operating leases.

      The following represents approximate minimum rental payments under such
      leases:

                  Year ending December 31,
                      1999                                    $189,004
                      2000                                     101,749
                      2001                                      86,418
                      2002                                       1,124
                                                              --------

                                                              $378,295
                                                              ========


                                      F-26
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE J (continued)

      Rent expense was approximately $91,000 and $154,875, of which $23,800 and
      $0 was paid to Len Ron, a real estate Company, for the years ended
      December 31, 1997 and 1998, respectively.

NOTE K - RELATED PARTY TRANSACTIONS

      1.    Spintech paid approximately $36,000 during 1997 to a company for the
            manufacturing of its "TAPS" and "SDS" products. An officer of that
            company is on the Board of Directors of Spintech.

      2.    The Company paid approximately $243,000 and $239,000 in 1997 and
            1998, respectively, to a law firm where one of the partners is also
            on the Company's Board of Directors. In addition, in 1997, warrants
            measured at a fair value of approximately $175,000 were issued to
            the law firm.

NOTE L - COMMITMENTS AND CONTINGENCIES

      1.    Failure to use Spintech's "TAPS" and "SDS" units in accordance with
            recommended operating procedures could potentially result in
            subjecting users to health hazards or injury. Spintech carries
            product liability insurance in the amount of $2,000,000 with a
            $1,000,000 per occurrence limit with a $10,000,000 umbrella.

            In 1998, the Company ceased selling these units.

      2.    In June 1996, the Company entered into a consulting agreement with a
            dentist for $25,000 per annum for three years.

      3.    The Company has informal arrangements for the manufacture of its
            products by separate domestic manufacturers as follows:
            SplatrFree(TM) prophy angles by Team Technologies, Inc.; The
            Wand(TM) unit and system kit by Tricor Systems, Inc. ("Tricor"); and
            The Wand(TM) disposable handpiece by Nypro Inc. Termination of the
            manufacturing relationship with any of the above


                                      F-27
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE L (continued)

            manufacturers could significantly and adversely affect the Company's
            ability to produce and sell its products. Though alternate sources
            of supply exist and new manufacturing relationships could be
            established, the Company would need to recover its existing tools or
            have new tools produced. Establishment of new manufacturing
            relationships could involve significant expense and delay. Any
            curtailment or interruption of the supply, whether or not as a
            result of termination of such a relationship, would adversely affect
            the Company.

      4.    In order to fund certain start-up costs of Tricor, the Company has
            agreed to advance funds on its first and second purchase orders to
            Tricor. Tricor will repay such advances from future sales to the
            Company. The Company had advanced net amounts of approximately
            $761,000 and $1,796,000 as of December 31, 1997 and 1998,
            respectively. These amounts are included in inventory. The Company
            has received a security interest in certain Tricor assets.

NOTE M - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

      Financial instruments which potentially subject the Company to
      concentrations of credit risk consist principally of cash and cash
      equivalents and trade accounts receivable. The Company places its cash
      with high credit quality institutions. In general, such investments exceed
      the FDIC insurance limit. Concentrations of credit risk with respect to
      trade accounts receivable are limited due to the fact that there exists no
      individually significant customers, comprising the Company's customer
      base, and their dispersion across different geographic areas. The Company
      routinely assesses the financial strength of its customers and, as a
      consequence, believes that its trade accounts receivable credit risk
      exposure is limited. In 1998, the Company had two customers who accounted
      for 24.6% and 22.6% of the Company's total sales.

      No customer accounted for more than 10% of revenues in 1997.

NOTE N - ADVERTISING

      The Company expenses its advertising costs as they occur. Advertising
      expense for 1997 and 1998 was approximately $1,132,000 and $1,761,000,
      respectively.


                                      F-28
<PAGE>

                   Milestone Scientific Inc. and Subsidiaries

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 1997 and 1998

NOTE O - SUBSEQUENT EVENTS

      Private Placement

      In March 1999, the Company concluded a $2 million institutional private
      placement with Cumberland Partners, other investment funds managed by or
      affiliated with Cumberland Associates and certain principals of Cumberland
      Associates. An additional $250,000 was raised from the Chairman and Chief
      Executive Officer of Milestone, on the same terms and conditions. The
      investors purchased, at face value, 3% Senior Convertible Notes Due 2003,
      convertible into Milestone Common Stock at prices increasing from $2.50
      per share in the first year to $6.00 per share in the fourth year, subject
      to antidilution protection in the event of stock dividends and certain
      capital changes. Purchasers of the Notes were granted rights to
      participate in certain future security offerings by Milestone.

      International Distribution Agreement

      In February 1999, the Company entered into an agreement for the
      international distribution by the Dent-X dental division of Automatic Film
      Processing ("AFP"), a medical equipment and supplies provider, of The
      Wand(TM), through the international distribution network previously
      established by AFP for its dental and medical imaging products, intraoral
      video cameras, digital X-ray systems and other dental products.

      Under the agreement, Milestone would continue to be responsible for
      distribution of The Wand(TM) in the United States, Canada, China, Hong
      Kong and Taiwan. AFP would assume certain existing international
      distribution arrangements previously established by Milestone in South
      Africa, Israel and certain other countries. AFP has a network of foreign
      distributors and representatives.

      AFP is a medical and dental imaging equipment supplier whose products are
      applied in medical and dental diagnostics. AFP's products are used in
      medical, dental and industrial markets. The Company's products and are
      sold worldwide under various brand names which include AFP, DENT-X and
      SENS-A-Ray 2000 (TM).

      CE Mark

      In January 1999, "the Wand(TM)" was approved under the Medical Device
      Directive 93/42/EEC, a requirement for all dental and medical devices
      distributed throughout the European Union. This authorizes Company to
      apply the CE mark to the product.


                                      F-29